Exchange-traded funds (ETFs) can be a great way for us to invest in the ASX share market and even the global share market. I invest in ETFs in my own portfolio and I'm planning to expand it to include another fund.
For readers who don't know what ETFs are, it's a good idea to read our explainer on them.
In simple terms, it's a fund that we can buy through a stock exchange (and our online broker) rather than having to go directly to the fund provider.
They can be very useful. Imagine you want to buy a variety of fruit – you can choose them yourself or you can buy a large basket of fruit that is already prepared. There are a number of fruit basket (ETF) providers, and the good providers charge an extremely small fee for putting the basket together.
There are some ETFs that are just focused on a particular sector, while others provide exposure to different geographic markets, such as Australia, the US or even the entire world.
Why ASX ETFs appeal to me
There are lots of great businesses that are listed on the ASX, but the ASX only represents 2% of the global market. I like that we can gain diversification through ETFs to countries and companies in a way that isn't available on the ASX.
The biggest ETF with the most money invested in it is the Vanguard Australian Shares Index ETF (ASX: VAS), which tracks 300 of the biggest businesses on the ASX.
There are some options that are focused on particular areas of the market where there may be strong tailwinds. It could be hard to identify a particular winner, so why not just buy a group of them?
Cybersecurity is becoming increasingly important, so the Betashares Global Cybersecurity ETF (ASX: HACK) could be an option.
There are a group of businesses aimed at making the world more sustainable by reducing emissions, being more efficient with resources, moving to electric transportation and so on, which is what Betashares Climate Change Innovation ETF (ASX: ERTH) gives exposure to.
I particularly like the options available to us to invest in ETFs that are created by looking at quality metrics, so we only end up with the strongest businesses in the ETF's portfolio. One of my favourites is the Vaneck Morningstar Wide Moat ETF (ASX: MOAT) and I'm planning to invest in the VanEck MSCI International Quality ETF (ASX: QUAL) sooner rather than later.
I expect to keep investing in ASX shares for the rest of my life, but I also want to make sure that my portfolio is invested in quality global businesses.
Another of the main reasons that I like ETFs is that they can be quite tax-effective because of how the portfolio updates itself. ETF portfolios regularly change to reflect the most current index, or whatever the rules of the ETF decide – we don't need to sell to the ETF itself for the portfolio to adjust, avoiding a capital gains tax event. A lot of ETF portfolios regularly change, which I think helps future-proof them.