Using exchange-traded funds (ETFs) can be a really good way to build wealth if investors aren't sure about which companies to buy into.
How they can help
Investing in an ETF can allow investors to buy a wide range of businesses in one go. That's useful for diversification.
Some allow investors to get exposure to a whole index like the S&P/ASX 300 Index (ASX: XKO), whereas others might be able to give investors access to a specific sector like Betashares Global Cybersecurity ETF (ASX: HACK) and VanEck Video Gaming and Esports ETF (ASX: ESPO).
There are two ETFs I'm going to write about in this article: one focused on ASX shares and one focused on quality US shares. I think they can work well together.
Vanguard Australian Shares Index ETF (ASX: VAS)
I think this is one of the easiest ways to invest in ASX shares because it gives investors the ability to invest in the ASX 300, which is 300 of the biggest businesses on the ASX.
It can be tricky to know which particular ASX shares to invest in, but the VAS ETF means you can buy a small piece of them all.
However, it's worth pointing out that the biggest businesses have the most significant allocations in the VAS portfolio. Thus, the bigger the position in the portfolio, the more influence it has on the ETF's returns.
That means names like BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Macquarie Group Ltd (ASX: MQG), Woodside Energy Group Ltd (ASX: WDS), Wesfarmers Ltd (ASX: WES), and Woolworths Group Ltd (ASX: WOW) have a significant influence on the VAS ETF.
It also owns names like Australian Finance Group Ltd (ASX: AFG), Adairs Ltd (ASX: ADH), and Temple & Webster Group Ltd (ASX: TPW). However, these are some of the portfolio's smallest positions.
While it offers some diversification, it is quite focused on financials and materials. In fact, those two sectors make up just over half of the entire portfolio.
The VAS ETF has an annual management fee of just 0.10%.
VanEck Morningstar Wide Moat ETF (ASX: MOAT)
This ETF is quite different. It's put together by a team of analysts at the research house Morningstar.
VanEck says the idea behind this ETF is that it "gives investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages". This can also be called an economic moat. It's one way of measuring the quality of the business.
Business strengths can come in different forms including brand power, intellectual property, cost advantages, and so on.
The Morningstar team have judged the businesses in the portfolio as having competitive advantages that are very likely to endure for at least a decade and, perhaps, for two decades. Names are only added to the portfolio if they are at "attractive prices relative to Morningstar's estimate of fair value".
On 17 August 2022, the biggest positions (out of 50) were: Kellogg, Veeva Systems, Polaris, Gilead Sciences, Blackrock, Ecolab, Etsy, Biogen, Boeing, Amazon.com, Microsoft, and MercadoLibre.
While past performance is not a guarantee of future results, over the past five years the MOAT ETF has produced an average return per annum of 16.4%, outperforming the S&P 500's return of an average of 15.3% per annum.
