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Beginner · Lesson 6 of 8

ETFs, index funds and managed funds

6 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

An exchange-traded fund (ETF) is a fund you buy on the stock exchange like a share. Most ETFs track an index such as the ASX 200 or S&P 500, so one purchase gives you hundreds of companies at low cost.

Index funds aim to match the market rather than beat it. Research such as the S&P SPIVA reports has found that most actively managed funds trail their index after fees over 10-15 years. That is why low-cost index investing is popular.

Check four things before buying an ETF: what index or strategy it follows, its yearly fee (management expense ratio), how big and liquid it is, and whether it is physical (owns the shares) or synthetic (uses derivatives).

Key takeaways

  • ETFs give instant diversification in a single trade.
  • Most active funds underperform their index after fees over long periods.
  • Compare fee, index, size and structure.

Check your understanding

1. What does an index ETF try to do?

  • Beat the market
  • Match a market index
  • Pick the best 5 shares
  • Avoid all losses
Show the answer

Match a market index. It tracks an index rather than trying to beat it.

2. What is the management expense ratio?

  • The yearly fee as a % of your investment
  • The price per unit
  • The dividend rate
  • The tax rate
Show the answer

The yearly fee as a % of your investment. MER is the annual cost charged by the fund.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.