The Best ASX Index Funds
to Invest In January 2025

Check out our Industry Experts’ report and
analysis on the Best Index Funds right now on the ASX

The Best ASX Index Funds to Invest In January 2025

Check out our Industry Experts’ report and analysis on the Best Index Funds right now on the ASX

What are Index Funds Australia?

Index funds are a type of bond index funds or mutual fund or even exchange-traded funds (ETF) that are designed to imitate the performance of a specific index (like that of the S&P 500 or the ASX 200). Simply put, an index fund is like a big basket that holds a little bit of all the companies in a specific stock market group, which is called an index.

Instead of relying on a fund manager to pick winning companies, index funds just copy the list of companies in that particular group and invest in all of them. Therefore, if the whole group (index) performs well, then your index fund does well too. It's considered one of the simple and low-cost ways in which even a novice person entering the world of the stock market can learn to invest in many companies at once without having to pick individual (winning) stocks.

How Do Index Funds Work?

Generally, index funds work by combining money from many investors and then investing that money in all the stocks of a chosen index. Say for example you're buying an index and tracking the ASX 200. This means that you are buying small portions of all 200 companies in the ASX 200 index. As the value of these 200 companies changes, so does the value of your index fund.

One of the straightforward and low-cost ways in the Australian and International shares is where you can gain exposure to how the market works without having to pick individual stocks. Index fund investing will help the investor build a diversified portfolio as the index contains a variety of companies in a single mix.

Index funds vs ETFs

For context, an exchange-traded fund is a stock that you can buy or sell on the stock market, but it holds lots various investments including but not limited to stocks, bonds or even a mix of both. Mutual funds are similar, but you usually buy them directly from the fund company and not on the stock market. Active management is when someone picks the stocks and passive management is when they follow an established index. Both exchange-traded funds and mutual funds can be managed either actively or passively.

The Australian Securities Exchange (ASX) picks index funds by considering some specific conditions such as market capitalisation/market cap and liquidity. It then selects companies that meet this criteria to be part of an index. Index funds then track the performance of these selected companies. The ASX 200 is a list of the 200 biggest companies in Australia, based on their market value and performance. When people talk about ASX 200, they are essentially referring to how these companies are doing as a whole. So, if the ASX 200 is going up, it means most of those companies are performing well. This is one of the most common ways to determine how the Australian stock market is performing.

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The Mechanism Behind Index Funds

The core framework of how index funds work involves a lot of technical details that need to be monitored regularly. Index funds rely on passive management. This means, that instead of active trading methods, an index fund uses algorithms to automatically adjust its holdings (in that big basket) to match the index (that specific group) it's tracking. There are complex steps that these algorithms follow to ensure the best possible performance of the index fund.

But here's a simple breakdown of the steps necessary for a better grasp of index funds:

Track the index - The algorithm looks at the list of selected companies in the chosen index (say the ASX 200). It then checks how much of each company should be bought/owned. This method is determined based on the size of that company or the value stated in the index.
Buying shares - The algorithm automatically calculates and bus shares of all the companies in the index, in the right proportions. Say if a company contributes to the majority of ASX 200, then the algorithm buys more amount of shares from that company.
Balance the funds - The companies do not always perform well constantly. There are going to be fluctuations in the value of companies. The algorithm tracks this progress and makes necessary balances of the fund's holdings. For example, if a company 'A' becomes more valuable (high performance), then the algorithm buys more shares of company 'A'. And if the value of a company say, 'B' reduces, then the algorithm sells some shares of company 'B'.
No estimation/assumption - The main objective of the algorithm is to track the index and adjust the holdings. It does not predict which stock will perform better.

This process involving algorithms (passive management) is what makes index funds an ideal way to begin with. There is nobody behind the mechanism like a fund manager, no specific individual picking stocks. There is however a systematic algorithm that tracks the performance of the index. This will help the investors to build a better investment portfolio, thus making index funds a versatile class of financial assets, that on a side note also require only minimum investment.

3 Best Index Funds In Australia to Invest in 2025

Vanguard Australian Shares Index ETF (VAS)

The Vanguard Australian Shares Index ETF is a prominent vehicle for investors aiming to mirror the performance of the S&P/ASX 300 Index. This Exchange traded fund provides a comprehensive overview of the Australian market by investing in 300 of the largest publicly listed companies in Australia.

iShares Core S&P/ASX 200 ETF (IOZ)

Operated by BlackRock, one of the world's leading asset management firms, the iShares Core S&P/ASX 200 ETF targets the S&P/ASX 200 Index, capturing the performance of the top 200 companies by market capitalization on the ASX. IOZ is designed for investors seeking exposure to a more concentrated segment..

SPDR S&P/ASX 200 Fund (STW)

As one of the pioneering ETFs listed on the ASX, the SPDR S&P/ASX 200 Fund holds a special place in the Australian investment landscape. Managed by State Street Global Advisors, STW seeks to replicate the S&P/ASX 200 Index, encompassing the crème de la crème of the Australian corporate world...

3 Best Index Funds In Australia to Invest in 2025

Vanguard Australian Shares Index ETF (VAS)

By covering a broad cross-section of industries—from financial services and healthcare to mining and technology— the Vanguard Index Funds offers a balanced representation of the Australian economy. Its diversified approach helps mitigate individual stock volatility, making it an attractive option for long-term investors.

Furthermore, Vanguard funds are renowned for being low-cost index funds, and VAS is no exception, featuring competitive management fees that enhance its appeal to cost-conscious investors.

iShares Core S&P/ASX 200 ETF (IOZ)

IOZ is designed for investors seeking exposure to a more concentrated segment of the Australian market, focusing on the largest and most liquid stocks. This ETF is particularly suited to those who believe in the strength and stability of Australia's biggest companies.

With its strategic composition, IOZ offers a blend of growth and income potential, distributing dividends to investors and providing a pathway to participate in the economic success of Australia's core industries.

SPDR S&P/ASX 200 Fund (STW)

The fund's longevity and popularity stem from its consistent track record and the robust performance of its underlying holdings. STW offers investors a transparent, efficient, and effective means to gain exposure to Australia's leading companies, making it a staple in the portfolios of both individual and institutional investors.

The fund's focus on the top 200 companies ensures that investors are invested in businesses that are not only large and stable but also have the liquidity necessary for the fund to manage its portfolio effectively.

Why Invest in Index Funds?

To have investment portfolios or investment funds containing index funds is a simple, smart and low-cost way to know more about stock exchanges and how the stock market works. Index funds in Australia track a specific market index like S&P/ASX 200, giving a broad exposure to many index funds. To buy index funds whether through exchange-traded funds or mutual funds, means that you're buying into hassle-free asset classes that also provide lower fees. Without having to pay high management fees as seen in an actively managed fund, many index funds act as true financial assets.

Index funds allow for access to a wide range of asset classes including Australian and international shares, making index funds a smart addition to an investment portfolio. A benchmark index is many index funds combined that allow investors to compare the investment strategy of their portfolio to the market index.

Pros and Cons of Investing in Index Funds Australia

Pros of Investing in Index Funds

Cost Effective

Since index funds are passively managed, they usually have a much lower annual management fee than actively managed funds. This makes them a cost-effective option.

Reduced Risk

Tracking

Cons of Investing in Index Funds

Market Performance Limitation

Since index funds are designed to match the market, they won't necessarily outperform it. To stand out, considering actively managed funds (that are managed by fund managers) might be more suitable although they come with higher fees.

Lack of Flexibility

How to Invest in ASX Index Funds

Investing in index funds is a very simple and straightforward way to kick-start a fruitful investment journey. That roadmap includes:

To buy index funds or ETFs, start by opening an account with a broker that gives you access to the ASX. Make sure to check their brokerage fees. After thoroughly considering factors like management fees, choose which index fund suits your investment goals. In ASX popular options that investors consider are the VAS, IOZ and STW. Most ETFs and mutual funds have no minimum investment. However, some unlisted managed funds might have higher minimum investment. Identify which funds align with your investment. A safer option would be index funds but if you're looking to get ahead in the stock market, consider other fund options.

Post choosing the index fund, you can buy shares through your broker, just like stocks. The price will be based on the net asset of the fund. The buying and selling of shares will be arranged via that broker to whom you'll be obliged to pay a certain amount of fee.

Are ASX Index Funds Right for You?

ASX index funds are a great fit for investors who are looking for a diversified portfolio with minimal risk. If you prefer a hands-off investment strategy and don’t want to actively pick stocks, index funds are ideal rather than managed funds in the long term which are essentially managed by a fund manager. However, if you’re looking to beat the market or focus on specific sector-based index funds or commodity index funds, you may want to explore other options like actively managed funds or emerging markets investments.

FAQs on Investing in Index Funds

What is an ASX Index Fund?

An ASX Index Fund is a type of investment fund that aims to replicate the performance of a benchmark index on the Australian Securities Exchange (ASX). By mirroring the index, these funds provide investors with broad market exposure, diversifying investments across various sectors and companies listed on the ASX, very similar to mutual funds.

Why Choose ASX Index Funds Over Individual Stocks?

How Do I Invest in ASX Index Funds?

Are ASX Index Funds Suitable for All Investors?

What Are the Fees for Investing in Index Funds?

How Do Index Funds Track the Market?

Can I Lose Money in Index Funds?

How Often Should I Check My Index Fund Investment?

How Long Should You Hold an Index Fund?

Are index funds beginner-friendly?

Do Index Funds Have a High Return?

What is a Benchmark Index?