Investors often tout exchange-traded funds (ETFs) as perfect investments for building a portfolio around. After all, one single ETF can represent a broad, comprehensive investment in an entire share market. But what about the Vanguard Diversified High Growth Index ETF (ASX: VDHG)?
Most ASX experts would recommend that most ASX investors (especially beginners) avoid building an ASX share portfolio around just one or two companies. Even the best companies can face existential crises, which can break an investment thesis.
Building a large and diversified portfolio of more than a dozen individual companies can help here. This helps to mitigate the risks of a catastrophic loss of capital in a portfolio that could stem from a black swan event.
However, that doesn't extend to ETFs. It's perfectly valid to have just one or two ASX ETFs in a share portfolio. Think about it. Buying an index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) is really buying into a fund that houses shares of 200 different companies on the Australian market. That's all the diversification you would need for an ASX portfolio.
You could double down on the diversification by adding another index fund. If one supplemented an ASX 200 ETF like IOZ with a US-focused fund like the iShares S&P 500 ETF (ASX: IVV), suddenly you have a portfolio covering the 200 largest shares on the ASX, as well as the 500 largest American shares. And that's with just two individual investments to look after.
But let's talk about the Vanguard Diversified High Growth Index ETF.
Can you use the VDHG ETF as a full ASX portfolio substitute?
This fund isn't your typical ASX ETF. In fact, it can be considered an ETF of ETFs, as it holds a collection of seven other Vanguard ETFs within its portfolio. As we covered last month, these different ETFs are designed to expose ASX investors to various markets and asset classes. There is an allocation to ASX shares. But also to international shares, bonds, emerging markets and cash assets.
This composition makes ASX's VDHG ETF uniquely eligible as a full-portfolio substitute for those who don't want to stick with just one Australian-focused ETF, such as the IOZ fund.
In effect, you're getting seven different ETFs, all covering different asset classes and markets, in one. As such, this one fund simply cannot be accused of suffering a lack of geographic, currency or investment diversity. This arguably makes it the perfect ETF to use for a diversified ASX share portfolio.
It would be perfect for an investor who wants to passively invest (perhaps using a dollar-cost-averaging strategy) in a broad swathe of shares and assets using a bottom-drawer, no-fuss fund.
