Vanguard research reveals that 86% of inflows into ASX exchange-traded funds (ETFs) over the first seven months of this year went into passive index-based ETFs.

The ETF provider said investors poured about $17.55 billion into ASX ETFs over the first seven months of this year and about $14.99 billion went into index-based ETFs.

ETFs are becoming more popular with investors. Vanguard says industry inflows totalled $6.7 billion in July, up from $2.5 billion in June, and $1.93 billion in May.

This took total ETF industry assets under management to a record $208.75 billion. 

Exchange-traded funds are baskets of stocks. Investors can buy and sell ETFs in the same way as individual shares.

Index-based ETFs seek to mirror the performance of various indices after fees.

Examples of index-based ETFs include:

• Vanguard Australian Shares Index ETF (ASX: VAS), which tracks the S&P/ASX 300 Index (ASX: XKO)
• BetaShares Australia 200 ETF (ASX: A200) which tracks the S&P/ASX 200 Index (ASX: XJO)
• iShares S&P 500 AUD ETF (ASX: IVV), which tracks the S&P 500 Index (SP: .INX)
• Vanguard US Total Market Shares Index ETF (ASX: VTS), which tracks the CRSP US Total Market Index (NASDAQ: CRSPTM1)

Index-based vs. actively managed ETFs

The main differences between index-based ETFs and actively managed ETFs is their goals, management, and costs.

Index-based ASX ETFs seek to track the performance of an index, thereby aiming to achieve 'market returns'.

All the ETF managers have to do is rebalance the ETF according to quarterly changes in the index. This is why index-based ETFs tend to have the lowest management fees.

Actively managed ASX ETFs require more work. The managers seek to outperform the market and deliver superior returns to investors through their expert stock selection and management.

Vanguard said there were 357 ASX ETFs available as of 31 July compared to 325 at the start of the year. Of those 357 ETFs, 243 track an index.

ETFs provide easy diversification in one trade for a single brokerage fee.

For example, the VAS ETF gives investors exposure to the Australian market's 300 biggest companies.

They are led by Commonwealth Bank of Australia Ltd (ASX: CBA) and also include BHP Group Ltd (ASX: BHP) and CSL Ltd (ASX: CSL), as well as small-caps like Megaport Ltd (ASX: MP1).

As we recently reported, the VAS was the most traded ETF among investors using the Selfwealth Ltd (ASX: SWF) platform in FY24.

Selfwealth said its Gen Z clients showed "the greatest relative interest in ETFs of any age group".