Here at The Motley Fool, we are obviously big fans of active investing and trying to beat the market. After all, what is the point of owning your own shares if not to try and achieve outsized returns. And yet, I still think that every investment portfolio should include at least one ASX exchange-traded fund (ETF).
An index ETF is designed to track an index as closely as possible. As such, a good ETF will never outperform the index it is tracking. But it will also give you the returns of said index. If an active investor fails to beat the market with their portfolio, then they would have been better off just owning the market in the form of an index ETF.
The best thing about an ASX share portfolio is that we can include all kinds of assets. There's nothing stopping anyone from having a mix of (hopefully) market-beating shares and ETFs that track the markets.
So I view an index ETF as an insurance policy of sorts.
Why ETFs can improve an ASX share portfolio
Say an investor has 50% of their portfolio in individual shares and 50% in an ASX index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ).
If that investor's individual shares outperform the market, then the investor still has a market-beating portfolio. If they don't, then the losses are cushioned by the half of their portfolio that tracks the market. Either way, the investor wins in my view.
It doesn't have to be an ASX ETF either. There are a number of quality funds on the ASX that track markets outside the ASX. The iShares S&P 500 ETF (ASX: IVV), for example, follows the most-tracked index in the world: the S&P 500. The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a similar fund but adds exposure to other advanced economies, such as Japan, Canada, and the United Kingdom.
This would add geographic and currency diversity to one's ASX portfolio – even more insurance. Not to mention some of the best companies in the world, such as Apple and Amazon.com.
ETFs are simple, easy to invest in and cheap. So unless an investor is supremely confident in their ability to consistently pick shares that outperform the market over time, then I think having an index ETF in a portfolio is always a good idea. Especially for a beginner investor.
