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.
