What are ETFs and how do they work in NZ?

Let’s say you’re at the dairy feeling like a snack. You could buy a lolly bag full of one type, like jet planes or milk bottles, or you could buy a mixed bag that has a bit of everything in it.

ETFs are a bit like the mixed lolly bags of investing - they can contain groups of assets like shares, bonds, or commodities, all packaged into one.

You can buy and sell ETFs on an exchange like the New Zealand Stock Exchange (NZX) for example, just like shares, which means they’re ‘exchange traded’. Simple.

When you buy an ETF you’re purchasing a portion of a big pool of assets (a fund). You’ll own a tiny bit of every investment that the fund holds, along with other investors.

Because ETFs are listed on stock exchanges, they’re typically very easy to buy and sell (or, in other words, highly liquid). You can usually purchase ETFs with as little as a few dollars, then if you need to sell, you can do so near instantly during market hours. Easy peasy.

ETFs also make it possible for beginner investors to invest in almost anything, from big American companies to property and emerging markets.

Buying an ETF is a great way to instantly diversify. Rather than buying a single stock, commodity, or bond, you’ll be buying a collection of different investments and spreading your risk across an asset class. This smooths out the ups and downs of investing (volatility), and reduces the risk of losing money.

For example, if you were to only buy shares in Apple andApple started to have problems or competitors started to get stronger, you could expect your portfolio to decrease in value.

But if you were to buy an S&P 500 fund (which contains Apple shares) you would also be invested in 499 other companies to offset that loss.

If you were to buy every share in an ETF individually, you may spend a small fortune in transaction fees. Buying an ETF is much more cost-effective - you can own a basket of dozens, or even hundreds of investments, with only one transaction.

Depending on the platform, ETFs can have a higher total cost than they look: Even if an ETF has a low management fee, your “all-in” cost can add up once you include platform/subscription fees, foreign exchange fees, and bid-ask spreads on each trade.

For small, frequent purchases, these frictions can materially reduce returns.

Analysis paralysis: With hundreds of ETFs available, it’s easy to get stuck comparing small differences (fees, index methodologies, replication types) and delay investing altogether.

May encourage overtrading: The ease of buying and selling units during market hours can nudge investors into frequent trading, market timing, or reacting to headlines - behaviours that often hurt long-term returns.

Buying and selling ETFs is easy. All you’ll need to do to get set up is choose a platform, and provide a few personal details like your IRD number and identification.

Kernel makes this process quick and easy via Kernel Shares & ETFs:

• If you don’t have a Kernel account, you’ll need to create one first, which takes a few minutes.

• Then you’ll need to fill out a short online form and tick a few boxes to enable access to Shares & ETFs.

• Last of all, you’ll need to add some money to your Kernel wallet.

That’ll all be done in minutes, then you’re ready to start buying and selling ETFs. You’ll have a selection of hundreds of the biggest and best-known ETFs to choose from, with $0 brokerage fees, $1 minimum orders, and competitive FX fees.

All investments are in NZD (unlike most other platforms), making it easier to understand and track your portfolio’s value.

Find out more about Kernel pricing

Investing successfully requires setting clear goals and doing your homework so that you understand what it’ll take to achieve them. If you’re new to investing, read our guide ‘How to start investing’ to learn the basics - and check out the below before buying ETFs.

Every ETF is different, but generally, they generate returns in three different ways:

• Dividends: when shares that the fund holds redistribute profit to shareholders. Learn more about dividends.

• Capital gains: when the assets held in the ETF increases in value.

• Interest: if the ETF holds interest earning assets like bonds.

If you’re investing over the long term, capital gains are usually the best way to generate substantial returns, while funds that earn interest are typically more conservative, short-term investments.

An investment professional chooses, reviews, and adjusts the assets held in actively managed ETFs, which means they typically charge higher fees. Passive funds, on the other hand, automatically adjust their holdings to track a market index like the S&P 500.

The problem is, the higher fees charged by actively managed ETFs don’t necessarily guarantee higher fees. In fact, SPIVA data shows that only a small percentage of actively managed funds beat their respective benchmark over longer periods.

That’s not to say actively managed funds can’t ever beat their indexed peers - just that passive funds often offer the best value for investors.

Read more about active VS passive investing

ETFs come in all different shapes and sizes, but most of them track some sort of index. These are usually designed to provide exposure to a certain part of the market - be it the largest companies in the US, emerging markets, the global tech industry, or the green energy trend.

Here are the main ‘types’ you should be aware of (note this is not exhaustive):

• Sector: track a certain industry, such as healthcare, tech, or property - these might be global, or focused on a market in a particular country, or locality.

• Broad market: track an entire market, such as the US share market (S&P 500) or the NZ share market (NZ50).

• Bond/fixed income: hold diversified collections of bonds (government, corporate, or otherwise) or cash or cash equivalents (commonly called money market funds in the U.S.)

• Thematic: provide exposure to assets well-positioned to benefit from certain trends or themes. For example, this might include green energy, artificial intelligence, digital currencies, or healthcare innovation. Typically, higher risk and more volatile due to narrower diversification.

You might hold all of these types of ETFs in your portfolio, a few, or just one. The secret to choosing the right ones is matching their volatility, and potential for returns, to your investment goals, investment horizon, and appetite for risk.

Fees are a key part of any investment as they can greatly affect your long-term returns. So before buying any ETF, it’s important to make sure you fully understand what you’re being charged. Here’s what you can expect:

• Monthly platform fees: Providers may charge a monthly fee to allow access to benefits within their platform. These are typically $0-$15.

• Trade or “Brokerage” fees: a fee charged per trade, expressed as either a percentage of the trade value or a set dollar amount. When you buy or sell. Kernel does not charge trade fees.

• FX fees: when you invest in ETFs in foreign markets, they must be purchased using a foreign currency, e.g, USD. FX fees are charged to cover the cost of the currency exchange - typically between 0.35% and 1.50%.

• ETF Management fees: these are the fees charged by the providers who put together and manage the ETF. These are usually lower for broad-based indexes and higher for thematic ETFs & actively managed funds.

While fees are important, remember - they’re not the be-all and end-all. What really matters is the returns you’re left with after fees are deducted - or in other words, value.

ETFs are not always as tax-efficient as some other investment types in NZ, since NZ ETF distributionsare typically taxed at 28%, the highest prescribed interest rate (PIR) and foreign ETFs are not PIEs so are taxed at your resident withholding tax rate (RWT).

Because of this, it may be better to consider other investment vehicles such as unlisted index funds for the core of your portfolio and use ETFs as satellite investments (more on this below).

Read more about ETFs vs Shares vs Unlisted Funds: Which is Right for You?

If you’re looking only at ETFs, it pays to zoom out and consider how unlisted index funds like Kernel’s can work alongside them.

Tax matters here: for many New Zealand investors, unlisted funds are generally more tax‑efficient. A simple way to bring it all together is a core-satellite strategy.

Use Kernel funds as your low-cost, tax‑efficient core for broad market exposure, then add ETFs as satellites to reach specific sectors or themes that Kernel doesn’t currently cover. You stay diversified and tax-aware at the core, with targeted access where it counts.

For more help building a diversified portfolio, read our guide to core-satellite investing.