Past years have seen investors add exchange-traded funds (ETFs) to their portfolios, with the percentage who own an ETF increasing from just 15% in 2020 to 20% in 2023.
ETFs are one of the most affordable ways to add instant diversification. We know from academic research that diversification smooths out portfolio returns and ensures ownership of the best businesses, both at home and abroad. When paired together in a portfolio, ETFs provide broad exposure across countries, sectors and asset classes.
Each investor has their own risk tolerance and time horizon, so it’s important to ensure your portfolio aligns with your overall investment goals. Compiled below are five ETFs suitable for a range of investment strategies and risk profiles.
1. Vanguard MSCI Index International Shares ETF (VGS)
- International shares
- 0.18% management fee
- Annual return since inception (2014) of 11.43%
VGS is a broad basket of nearly 1,500 public companies located in share markets outside of Australia. Over 71% of the fund is invested in companies located in the United States, with smaller weightings to Japan, United Kingdom, France and Canada. Overall, the fund is invested in 23 different nations.
Keep in mind that the United States is the primary exchange for public companies, so it’s not uncommon for the country to dominate global indexes. Moreover, many of the companies listed in the US have international operations, such as Apple, Microsoft and Netflix.
On a sector basis, the largest positions are in technology (22.6%), financials (14.5%) and healthcare (12.6%). This is quite different to the local stock exchange, which has 50% allocated to just miners and banks.
Paired with an Australian ETF such as VETH, this would provide an investor with diversified exposure to both local and international shares. Keep in mind the ETF is not currency-hedged, so underlying movements in foreign exchange can also impact performance.
Disclosure: VGS is held in InvestSMART diversified portfolios.
2. Vanguard Ethically Conscious Australian Shares (VETH)
- Australian shares
- 0.16% management fee
- Annual return since inception (2020) of 4.61%
VETH begins with the 300 largest companies in Australia and then implements an ethical screen. This means companies are excluded from the ETF that have operations in “sin” industries such as fossil fuels, alcohol, tobacco, gambling and weapons. The ETF also removes companies that have a history of human rights, labour abuses or failed to meet minimum diversity targets.
The ethical screen means the fund looks different to other Australian ETFs. VETH has 252 companies and has excluded Australia’s largest public company miner BHP. As a result, the top ten companies account for over 50% of the ETF and financials account for over 35% of the holdings.
Ethical investing is gaining greater traction in Australia as more investors choose to deploy capital in ways that align with their values. However ethical products vary in nature and investors should read through how companies are included/excluded. For example, VETH excludes nuclear energy, which some investors may prefer to have exposure to.
Disclosure: VETH is held in InvestSMART diversified portfolios.
3. iShares Core Composite Bond ETF (IAF)
- Australian fixed income
- 0.10% management fee
- 10-year annual return of 2.42%
When governments or corporations want to finance a project, such as a new highway or factory, they can issue public debt, commonly called a bond. A bond is a contractual agreement for the issuer to pay the bond owner a predetermined interest rate each year, with the capital amount returned at maturity.
Each bond is ascribed a rating by an independent rating agency. The highest is “AAA”, followed by “AA”, “A”, “BBB”, “BB” and so on. “AAA” bonds signify the lowest risk of default and are considered extremely safe.
Over half of the 592 bonds owned in IAF are issued by the Australian Federal Government, which is just one of eleven nations globally with the highest “AAA” credit rating. The remainder is issued by state and international banks, the majority of which have “AA” ratings.
Historical returns have been weighed down by falling interest rates. However, the recent rate hikes by the Reserve Bank of Australia should result in new bonds on more favourable terms.
This ETF is suitable for income investors, who want reliable and regular interest payments with limited fluctuations in the capital value.
Disclosure: IAF is held in InvestSMART diversified portfolios.
4. Betashares Australian High-Interest Cash ETF (AAA)
- Australian cash deposits
- 0.18% management fee
- 10-year annual return of 2.04%
The AAA ETF is effectively a savings account in the form of an ETF. The fund pays income monthly derived from cash deposits at banks including NAB, Bendigo Bank, Bank of Queensland, Rabobank and JP Morgan.
The primary benefit is investors do not need to open a bank account with each bank or be subject to short-term “holiday” offers that expire. Therefore it is a suitable substitute for a savings account or investors who need regular income.
The ETF is leveraged to interest rates, so as rates rise does the return of the fund. Conversely, when rates fall, income will proportionately decrease. The fund is currently yielding 4.44% after fees and does not require investors to lock up capital in a term deposit.
Disclosure: AAA is held in InvestSMART diversified portfolios.
5. Betashares NASDAQ 100 ETF (NDQ
- International technology shares
- 0.48% management fee
- 10-year annual return of 21.23%
NDQ tracks the 100 largest non-financial companies on the NASDAQ. The NASDAQ is an exchange located in the United States that is known for attracting innovative companies, particularly in the technology space. Companies you might be familiar with on the NASDAQ include Zoom, Facebook, Google and Airbnb.
The ETF is appropriate for investors who are looking to gain exposure to leading technology companies, which are generally underrepresented locally. For example, VETH’s sector weight to technology is 4.2% compared to 49.3% for NDQ.
The ETF also provides easy exposure to US shares without the onerous tax (W-8 BEN forms) investors need to maintain when directly purchasing individual shares.
Keep in mind the ETF is reasonably concentrated, with four companies (Apple, Microsoft, Amazon and NVIDIA) accounting for over 30% of the holdings.
NDQ is more expensive than the other four ETFs we have mentioned. It’s not held in our portfolios currently, but we remain attracted to the broad technology exposure and track record of returns.
How to invest in these ETFs
There are several ways to access these ETFs. You can do it yourself via an online broker, while this method is easy, you have to have a good understanding of your own risk profile, investment horizon and know what percentage of each ETF you need to purchase to ensure you get your asset allocation right. The brokerage costs can also quickly add up if you're investing regularly. Another way is through an online wealth creation platform like InvestSMART. We provide diversified ETF portfolios ranging from conservative to high growth, and we do all the asset allocation for you.
Disclaimer: VGS, VETH, IAF and AAA are current holdings in InvestSMART portfolios
