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The easiest way to start investing? Diversified ETFs

Investing can feel complex, and with over 300 exchange-traded funds (ETFs) on the ASX, how do you know where to start? Diversified ETFs could be the answer.

Investing can feel complex, and with over 300 exchange-traded funds (ETFs) on the ASX, how do you know where to start? Diversified ETFs could be the answer.

Exchange traded funds

An exchange traded fund, or ETF for short, is a fund that you can buy or sell on an exchange like the ASX. Investing in a managed fund used to involve a whole lot of paperwork and long delays between sending your money and having it invested.

ETFs are designed to streamline this process, allowing an investor to buy ETF units the same way they would buy shares of a company like Woolworths Group Ltd (ASX: WOW) or Apple Inc (NASDAQ: AAPL).

The benefit of an ETF over individual shares is that an ETF represents a basket of companies or assets. Instead of buying shares in one company, buying one ETF unit can give you exposure to hundreds or even thousands of companies in one purchase.

In other words, ETFs offer instant diversification.

So, what’s a diversified ETF?

Typically, an ETF will focus on one asset class, sector, or market. For example, the Betashares Australia 200 ETF (ASX: A200) invests in the largest 200 companies in Australia. Or the iShares Core Composite Bond ETF (ASX: IAF) invests in government and corporate bonds from around the world.

But what if you want to invest in multiple markets or across asset classes? For example, maybe you want exposure to Australian shares and US shares, or maybe Australian shares and bonds.

You could buy multiple ETFs or, you could buy one diversified ETF.

A diversified ETF, like the name suggests, is diversified across multiple asset classes and markets. It’s essentially an ETF that holds multiple other ETFs.

Diversified ETFs basically do the hard work for you, choosing the assets classes and markets to invest in and importantly, keeping your portfolio balanced.

If you invest in multiple ETFs yourself, you need to manage the rebalancing of your portfolio yourself.

Let’s say you want 40% of your portfolio in Australian shares, 40% in US shares, and 20% in bonds.

If the US shares grow faster than the Australian shares and bonds, then after a time your allocation will start to shift towards the US shares. You may end up with 50% US shares, 40% Australian shares, and 10% bonds.

This could become an issue if you’re a conservative investor who wants to maintain a larger allocation to fixed income assets. It means you would need to sell some of your US shares and buy more bonds to rebalance the portfolio.

Diversified ETFs do that work for you, ensuring your allocations remain at the level you want them.

What are my diversified ETF options?

The good news is, there are plenty of diversified ETF options on the ASX.

Vanguard has a range of ETFs that cater to different risk tolerances. For instance there’s the Vanguard Diversified Conservative Index ETF (ASX: VDCO) for heavier fixed income allocations, or the Vanguard Diversified High Growth Index ETF (ASX: VDHG) for growth oriented investors.

Betashares has a similar range but with a focus on ‘ethical investing’, including the Betashares Ethical Diversified Growth ETF (ASX: DGGF).

I think these diversified ETFs are a great place to get started because they give you instant diversification, they manage the hard work of balancing portfolios, and they have reasonably low fees. The Vanguard funds only charge 0.27% per year while the Betashares funds charge 0.39%.

If I was getting started today, this is an option I’d strongly consider.

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report for FREE by CLICKING HERE NOW and creating a 100% FREE Rask Account.

(Psst. By creating a free Rask account, you’ll also get access to 15+ online courses, 1,000+ podcasts, invites to events, a weekly value investing newsletter and more!)

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Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

At the time of publishing, the author of this article owns units in the Betashares Australia 200 ETF (ASX: A200).
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