Exchange-traded funds (ETFs) can be an effective way to get diversification and exposure to a particular theme.
These two options have produced strong returns and offer diversification:
VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)
The purpose of this ETF is to give investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team.
Targets companies have to be trading at attractive prices relative to Morningstar’s estimate of fair value. There is a focus on quality U.S. companies Morningstar believes possess sustainable competitive advantages, or “wide economic moats”.
At the end of December 2020 VanEck Vectors Morningstar Wide Moat ETF had 50 holdings. The largest positions were: John Wiley & Sons, Charles Schwab, Corteva, US Bancorp, Wells Fargo, Constellation Brands, Bank of America, Boeing, Yum! Brands, Cheniere Energy, Zimmer Biomet, Raytheon Technologies, Medtronic, Berkshire Hathaway, Compass Minerals International, Aspen Technology, Bristol-Myers Squibb, Philip Morris, Amazon and Intel.
As the name suggests, all of the businesses in this ETF are listed in the US. However, the underlying earnings are generated from many different countries. For example, Amazon has a huge presence in Europe and it’s growing in Australia too.
In terms of sector diversification, there are five industries that have a weighting of more than 10%: information technology (22.2%), healthcare (18.2%), financials (17.1%), industrials (11.3%) and consumer staples (10.1%).
VanEck Vectors Morningstar Wide Moat ETF has annual management costs of 0.49% per annum. It has made average net returns of 16% per annum over the last five years, outperforming the return of the S&P 500. The ETF isn’t that old, so looking at the returns of the index that the ETF tracks, the index has returned an average of 19.3% per annum over the last 10 years.
Betashares Nasdaq 100 ETF (ASX: NDQ)
This ETF is about providing investors access to 100 of the largest businesses on the NASDAQ, which has a heavy tech influence.
Indeed, many of the western world’s biggest technology businesses are listed on the NASDAQ.
You may recognise all of Betashares Nasdaq 100 ETF’s largest 10 holdings: Apple, Microsoft, Amazon, Alphabet, Tesla, Facebook, Nvidia, PayPal, Adobe and Netflix.
There are plenty of quality technology names in the ETF like Intel, Broadcom, Qualcomm, Texas Instruments, Advanced Micro Devices, Intuit, Intuitive Surgical, Zoom and so on.
However, this isn’t purely a ‘tech’ ETF, it’s just the largest businesses on the NASDAQ, so there are some quality non-tech names within such as Costco, Mondelez International and Gilead Sciences. However, almost half of the ETF is officially classified as IT and others within it are largely tech but not classified as IT (for example Alphabet, which includes Google, is classified as ‘communication services’).
Betashares Nasdaq 100 ETF has an annual management fee of 0.48% per annum. The returns of this ETF over the shorter-term and long-term have outperformed the ASX. Over the past year its net return has been 34.4%, over the past three years it has delivered average returns per annum of 26.2% and since inception in May 2015 the ETF has returned an average of 21.7% per annum.
BetaShares says that with its strong focus on technology, Betashares Nasdaq 100 ETF provides diversified exposure to a high-growth potential sector that is under-represented in the Australian share market.