I believe that ASX-listed exchange-traded funds (ETFs) may be some of the best investments that retirees can choose because of their ability to provide diversification and good returns.
One of the tricky things about the share market is that it can be hard to know which shares to buy and how much of each one to own.
ASX ETFs can take a lot of guesswork out of the investment process. Each ETF comes with its own portfolio of shares and can provide access to economic areas that Aussie retirees may not already have.
It wouldn't surprise me if plenty of Australian retirees have significant exposure to Australian residential property, ASX bank shares, and ASX mining shares. But an investment portfolio focused on Australia could use some additional diversification, in my view. That's why I think global ASX ETFs could be very effective investments to consider.
ASX ETF diversification
With the ASX weighted towards bank and resource businesses, it'd be useful to balance existing Australian-focused investments with other sectors from the global economy, such as IT, healthcare, industrials, and so on.
Australia is a great country, but it is only approximately 2% of the global share market. There are plenty of opportunities in that other 98%.
For example, the Vanguard MSCI Index International Shares ETF (ASX: VGS), which provides access to the global share market, has a double-digit allocation to five different sectors – IT (25.2%), financials (15%), healthcare (11.8%), industrials (11.2%) and consumer discretionary (10.3%).
Australia has benefited enormously from the wealth unlocked by ASX miners selling Australian commodities to the world. However, they aren't the sort of businesses that can consistently generate strong profits and reinvest to unlock further good returns.
There are great businesses outside of Australia that are worth owning, in my opinion, such as Apple, Microsoft, Nvidia, Alphabet, Amazon.com, Meta Platforms, Broadcom and Berkshire Hathaway.
Several different ETFs, such as the VGS ETF, iShares S&P 500 ETF (ASX: IVV), and Vanguard US Total Market Shares Index ETF (ASX: VTS), can provide exposure to these globally leading companies.
Investing for good diversification can reduce the risks and unlock strong returns.
Good returns
Many international businesses are focused on global expansion, which gives them plenty of earnings growth potential. The more earnings can grow, the more the share price can rise in the future.
If businesses are achieving relatively high profit margins, then as shareholders, we want them to reinvest a lot of their generated cash flow to deliver more growth because that is likely to generate a better overall return, even if that's at the expense of a higher dividend yield in the short term.
There are plenty of global ASX ETFs that have performed well over the longer term. While past performance is not a guarantee of future performance, I think some ASX ETFs can continue performing well in the long term if they're invested in globally growing companies.
Some of the funds I like for this include the VGS ETF, Betashares Global Quality Leaders ETF (ASX: QLTY), VanEck MSCI International Quality ETF (ASX: QUAL), and VanEck Morningstar Wide Moat ETF (ASX: MOAT).
These funds aren't known for having high dividend yields, so it could be helpful for a retiree to sell a small portion of their holding each year to unlock some cash flow. The ASX ETF's returns could be strong enough to sustain small sales and continue growing an investor's overall wealth.
