Starting an investment portfolio is an exciting time. A world of possibilities opens up, limited only by the horizons of the investable universe. So how do you stretch your investment dollar as far as possible? One option is to use exchange-traded funds (ETFs) to extend your exposure.
Here we take a look at 7 ETFs perfect for the starter portfolio.
When you are starting your investment portfolio there are a lot of decisions to be made – everything from which brokerage to use to what level of risk you are comfortable with. Perhaps the most difficult decision to make is what to invest in.
Investment funds are never unlimited, especially when starting a portfolio. This limits the number of possible investments that can be made, constraining the ability to diversify. Diversification is recommended to reduce risk and smooth volatility of returns. The use of ETFs can overcome this constraint.
ETFs are traded on the ASX like shares, but instead of giving exposure to one company they provide exposure to a basket of underlying securities. ETFs can give instant diversification in a single trade. Plus, different ETFs have been designed to give exposure to different sectors and geographies. ETFs can be used to gain exposure to ASX shares, US shares or international shares. This makes them perfect for a starter portfolio.
Betashares Australia 200 ETF (ASX: A200)
Betashares A200 provides exposure to the largest 200 companies listed on the ASX, based on market capitalisation. Distributions are paid quarterly and management fees are 0.07% per annum.
The fund returned 19.23% in the year to 31 October. Top holdings include Commonwealth Bank of Australia (ASX: CBA) (7.9%), CSL Limited (ASX: CSL) (6.6%), BHP Group (ASX: BHP) (6.0%), Westpac Banking Corp (ASX: WBC) (5.6%), National Australia Bank Ltd (ASX: NAB) (4.7%), Australia and New Zealand Banking Group (ASX: ANZ) (4.3%), Woolworths Group Ltd (ASX: WOW) (2.7%), Wesfarmers Ltd (ASX: WES) (2.5%), Macquarie Group Ltd (ASX: MQG) (2.4%), and Telstra Corporation Ltd (ASX: TLS) (2.3%).
iShares Core S&P/ASX 200 ETF (ASX: IOZ)
IOZ aims to provide investors with the return of the S&P/ASX 200 Accumulation Index before fees and expenses. Distributions are paid quarterly and management fees are 0.09% per annum. The fund returned 19.10% in the year to 31 October. Top holdings are similar to those of the Betashares Australia 200 ETF.
VanEck Vectors Australian Equal Weight ETF (ASX: MVW)
For a different approach, MVW held 85 ASX listed shares as at 31 October and tracks the the MVIS Equal Weight Index (before management costs). The Index is diversified across companies and sectors and includes the largest and most liquid ASX companies. The Fund returned 18.26% in the year to 31 October.
Distributions are paid twice annually and management fees are 0.35% per annum. Top 10 holdings include Iluka Resources Limited (ASX: ILU) (1.45%), Challenger Ltd (ASX: CGF) (1.30%), Stockland Corporation Ltd (ASX: SGP) (1.30%), Star Entertainment Group Limited (ASX: SGR) (1.30%), CSL Limited (1.29%), Sydney Airport Holdings Pty Ltd (ASX: SYD) (1.29%), Lendlease Group (ASX: LLC) (1.28%), Santos Ltd (ASX: STO) (1.28%), Caltex Australia Limietd (ASX: CTX) (1.27%), and SEEK Limited (ASX: SEK) (1.26%).
Vanguard US Total Market Shares Index ETF (ASX: VTS)
VTS provides exposure to some of the world’s largest companies listed in the United States. The fund aims to track the CRSP US Total Market Index and has provided returns of 16.73% in the year to 31 October.
The fund is not hedged so investors are exposed to fluctuations in the AUD/US exchange rate. Distributions are made quarterly and management costs are 0.03% per annum. Top holdings include Microsoft (3.61%), Apple (3.34%), Amazon (2.46%), Facebook (1.52%), Berkshire Hathaway (1.33%), JPMorgan Chase & Co (1.25%), Alphabet Class A (1.24%) and Alphabet Class C (1.23%).
iShares S&P 500 ETF (ASX: IVV)
IVV tracks the performance of the S&P 500 index, comprised of large capitalisation US shares. The ETF returned 17.18% in the year ended 31 October. Distributions are made quarterly and management fees are 0.04% per annum.
The fund is not hedged so investors are exposed to fluctuations in the AUD/US exchange rate. Top holdings at the end of October were Microsoft (4.33%), Apple (4.13%), Amazon (2.92%), Facebook (1.82%), and Berkshire Hathaway (1.65%).
Vanguard MSCI Index International Shares ETF (ASX: VGS)
VGS provides exposure to many of the world’s largest companies listed in developed economies. The fund aims to track the return of the MSCI World ex-Australia Index (with net dividends reinvested) in Australian dollars before fees, expenses and tax. The fund provided a returns of 16% in the year to 31 October.
Distributions are made quarterly and management fees are 0.18% per annum. The ETF held 1,589 shares as at 31 October with 64.3% of holdings based in the United States. The top four holdings were Apple (2.77%), Microsoft (2.53%), Amazon (1.80%), and Facebook (1.12%). Other top 10 holdings included JPMorgan (0.99%), Alphabet Class C (0.96%), Alphabet Class A (0.91%), Johnson & Johnson (0.85%), Nestle (0.79%), Proctor & Gamble (0.76%), and VISA (0.75%).
Vanguard All-World Ex-US Shares Index ETF (ASX: VEU)
For a less US-heavy focus, VEU provides exposure to many of the world’s largest listed companies in developed and emerging economies outside the United States. The ETF tracks the FTSE All World Ex-US Index before fees, expenses and tax and returned 14.62% in the year to 31 October.
Distributions are made quarterly and management fees are 0.09% per annum. The ETF held 3,380 securities as at 31 October spread across Japan, China, the United Kingdom, France, Canada, Switzerland, Germany and more. Top holdings included Nestle (1.38%), Alibaba (1.12%), Tencent Holdings (1.04%), Roche Holding (0.94%), Novartis (0.84%), Toyota (0.77%), Taiwan Semiconductor Manufacturing Co Ltd (0.69%), and HSBC (0.68%).
ETFs can be used to gain exposure to the ASX, US shares or other internationally listed companies. They can provide broad exposure and instant diversification in a single trade, making them an ideal investment for a starter portfolio.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.