Vanguard Investments Australia, which is part of the Vanguard Group, is preparing to add exchange traded funds (ETFs) to its roster of products.

Vanguard Group, which manages more than $1 trillion, is among the leading ETF managers in the US. Vanguard entered the US ETF market in 2001 and, by the end of 2008, investments in its range of 38 ETFs totalled more than $45 billion or an increase of 8% compared with the previous year. Four of Vanguard's ETFs were among the top 20 best-selling in the US in 2008.

Ian Alcock, managing director of Vanguard Australia, says the launch of ETFs into the Australian market is a natural extension of the fund house's capabilities in the US.

There are only two providers of ETFs in Australia at the moment: State Street Global Advisors (SSgA), which has four ETFs with local underlying assets; and Barclays Global Investors, which has 16 ETFs with international underlying assets. ETFs were first launched in Australia in 2001, when SSgA listed three funds tracking the S&P/ASX 50 index, the S&P/ASX 200 index and the S&P/ASX 200 Listed Property Trust index.

ETFs are managed funds that are traded on the stock exchange. Index-based ETFs are designed to provide investors with a diversified portfolio in a cost-efficient way. Managers of ETFs note flexibility, liquidity and transparency of shares as advantages of investing in these types of listed products.

The global market turmoil has led more investors, both institutional and retail, to turn to ETFs to maintain an exposure to equities without needing to have strong convictions over specific stocks.

Globally, there are more than 1,600 ETFs representing more than $650 billion in assets now available to institutional and individual investors, according to Vanguard. Five of the 10 most actively traded US equities are ETFs.

Vanguard has decided to enter Australia's ETF market even if demand has been relatively muted compared with the US or Europe because the potential for long-term growth is attractive, says Robin Bowerman, the fund house's head of retail.

"The funds management industry may be going through a period of rationalisation and cutbacks but Vanguard is sticking to its philosophy of investing for the long-term by developing the product and operational capability to deliver ETFs to Australian investors," Bowerman says.

ETFs will provide financial advisers with an alternative way to access Vanguard's indexing approach, which can assist in reducing overall costs for clients and manage risks through diversification, Bowerman says. They will also offer a flexible option in portfolio construction, with the ability to represent the core or a satellite investment in the portfolio, he adds.

"ETFs are a new way to access all the same benefits that our unlisted index funds have offered investors for the past 10 years. Two of the lessons out of the past year are that diversification and asset allocation are critical factors for investors," Bowerman says. "ETFs are powerful tools for investors looking to build well-diversified portfolios with sensible long-term asset allocations."

Vanguard has declined to provide further details of its Australian ETF products as they are still subject to regulatory and legal approval. Vanguard manages around A$60 billion in index funds in Australia, for both institutional and retail investors.