ETFs or Exchange Traded Funds have grown enormously in the last decade. Both their number and the money invested in them continue to increase. From around $50 billion invested ten years ago the total has grown to $472 billion now, in 494 funds, according to Lonsec Research.

ETFs are similar to traditional managed funds in that they own a pool of many investments, but are different in that the ETF units are traded on the share market.

ETF’s started out as index tracking funds and most still are. If it was an ETF tracking the Dow Jones Index the fund simply bought shares in all the companies that make up that Index. It did not employ any clever, highly-paid fund managers and charged low fees. It provided average returns.

The main benefits were the diversification across many companies and the avoidance of below-average returns. The downside was never receiving above-average returns either. ETF’s have been developed that replicate every major index on Australian and overseas markets.

The main competitors to ETFs are active fund managers. Their aim is to beat the averages by making smart investment choices that outperform the averages. Sometimes they succeed and sometimes they don’t. Many financial advisers prefer actively managed funds to index funds.

Actively managed funds outperformed passive on average from 2000 to 2011 but passive funds have done better since. However one fund manager thinks that may be starting to change.

From their early days of simply tracking the major, well-known market indices ETFs have become increasingly specialised. ETFs were set up tracking the mining share average or industrial company average, or the US technology company index.

Active managers would argue that, if your preference was the mining sector, it was possible to pick some of the better performing mining companies and earn above average returns from active funds.  

ETFs have continued to specialise making some of them now very interesting. For example there are AI ETFs. Many risk-taking wealth accumulators want to profit from AI, but which companies will be the winners? An ETF that buys all major AI focused companies may be the answer.

There are ETFs investing in microchip manufacturers, lithium miners, AI infrastructure, copper producers, and many other specialised industries. If you believe copper is a key ingredient of the future, a copper ETF might work for you.

It is specialised and higher risk but at least you aren’t relying on just one company. One ETF provider has just launched a Space Tech ETF with the ASX trading code MOON. Let’s hope its performance is …