There are some really good exchange-traded funds (ETFs) that could be good options to provide diversification.
Why are they useful for diversification?
One of the main benefits of ETFs is that with just one investment you can buy a whole group of businesses. That can be really useful to gain diversification quickly.
There are some particular ETFs that provide excellent global diversification, which might be exactly what some ASX investors need:
Vanguard Msci Index International Shares ETF (ASX: VGS)
This ETF is about giving investors exposure to the global share market with businesses listed in developed countries.
Numerous markets are given allocations with this ETF including: the US, Japan, the UK, France, Canada, Switzerland, Germany, the Netherlands, Hong Kong, Sweden, Denmark, Spain, Italy and Singapore.
This ETF has over 1,500 holdings across all of those different countries, so it’s extremely diversified. As its largest holdings, it has all of the major global US businesses including Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, JPMorgan Chase, Johnson & Johnson, Visa and Walt Disney.
It’s also well diversified when it comes to sector allocation, with five sectors having a weighting of more than 10%: IT, financials, healthcare, consumer discretionary and industrials.
Over time, the best businesses will become larger parts of the portfolio and generate more of the return.
During the five years to 28 February 2021, the ETF generated average net returns per annum of 12.4% – that’s after the annual management fee of 0.18% per annum.
According to Vanguard, the portfolio’s return of equity (ROE) ratio is 15.9%. Its dividend yield is 1.8%.
iShares S&P 500 ETF (ASX: IVV)
In some ways, this investment is similar to the first one – it has a similar top holdings list of Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, Berkshire Hathaway, JP Morgan Chase and Johnson & Johnson.
But there are a few key differences. As the name might suggest, this ETF has 500 holdings – significantly less. This means that the weightings to the big tech companies is higher, if that’s what you want. Also, all of the businesses are listed in the US.
With the iShares S&P 500 ETF, the cost is actually lower. It’s one of the cheapest investment options on the ASX with an annual management fee of just 0.04%.
The low management fees and strong performance of the underlying shares has helped the ETF deliver net returns of 17.3% per annum over the last decade and a net return of 25.4% over the last 12 months.
As you might expect, the portfolio is more weighted to technology shares, with IT making up more than a quarter of the fund. The ‘communication’ sector, which includes Facebook and Alphabet, makes up another 11.2% of the portfolio.
Bearing in mind the effects of COVID-19, the trailing yield of the ETF over the last 12 months has been 1.24%.