2 of the best ETFs for diversification

iShares S&P 500 ETF is one option that could provide excellent diversification.

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A few different exchange-traded funds (ETFs) may be able to provide investors with a high level of attractive diversification.

It can be tricky to choose which investments to go for. One option might be to choose ETFs, which can give investors diversification because they are invested in dozens or even hundreds of businesses in a single investment.

Every ETF is different. Some focus on ASX shares. There are industry-specific ones. These two may be able to provide attractive diversification:

iShares S&P 500 ETF (ASX: IVV)

Warren Buffett himself has recommended to (predominately American) investors that they should look at a S&P 500 fund:

I recommend the S&P 500 index fund and have for a long, long time to people.

If you just had a diversified group of equities, U.S. equities, that would be my preference, but to hold over a 30-year period.

I just think that the best thing to do is buy 90% in S&P 500 index fund.

What is the S&P 500? It’s 500 of the biggest businesses that are listed in the US, with both NASDAQ and New York Stock Exchange businesses.

There is a lot of diversification by having 500 holdings. However, the top ten positions represented around 30% of the portfolio at 30 November 2021: Apple, Microsoft, Amazon.com, Tesla, Alphabet (class A and C shares), Nvidia, Meta Platforms (Facebook), Berkshire Hathaway and JPMorgan Chase.

Past performance is not a reliable indicator of future performance, but this S&P 500 ETF has performed strongly over the last five years thanks to the underlying holdings with a net return per annum of 18.6%.

This investment has one of the lowest management fees of any ETFs on the ASX, at 0.04% per year.

Vanguard Msci Index International Shares ETF (ASX: VGS)

There are both similarities and differences between this ETF and the S&P 500 one.

Looking at the top holdings, there are many similar names. In-fact, at the end of November 2021, the only two different names in the Vanguard portfolio’s biggest holdings were Home Depot and UnitedHealth.

However, a key difference is the fact that the Vanguard Msci Index International Shares ETF is invested in the global share market across the ‘developed’ world.

Obviously the US is the dominant allocation, but other countries also have weightings of at least 1% including Japan, the UK, Canada, France, Switzerland, Germany, the Netherlands and Sweden.

This ETF actually owns almost 1,500 businesses in the portfolio. The smaller positions do not have much effect on the overall ETF performance, but the diversification is there.

Some of the biggest non-US shares in the portfolio includes Nestle, ASML, Roche, LVMH, Toyota, Novo Nordisk, Novartis and Shopify.

Whilst Vanguard Msci Index International Shares ETF hasn’t performed as well as the S&P 500 fund over the last five years, it comes with increased diversification and as a reminder, past performance is not a reliable indicator of future performance. The past five years has seen an average net return per annum of 15.8%.

Vanguard Msci Index International Shares ETF has an annual management fee of just 0.16% per annum.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Vanguard MSCI Index International Shares ETF. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF and iShares Trust - iShares Core S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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