I recommend that most Aussies consider whether exchange-traded funds (ETFs) could be a good addition to their portfolio because of the diversification they can provide.
Some ASX ETFs can provide exposure to the S&P/ASX 200 Index (ASX: XJO), an index of 200 of the largest businesses on the ASX. But instead of an ASX 200 Index tracker like the iShares Core S&P/ASX 200 ETF (ASX: IOZ), I think there are other types of ASX ETFs out there that can provide good exposure to different-sized businesses and outperform the ASX over the long term.
We can use ETFs to get exposure to large, mid, and small caps in Australia or around the world. In this article, I'll discuss three of them.
The IOZ ETF has returned an average of 8.15% per annum over the past decade, so hopefully, the ideas below could outperform that figure. Past performance is not a reliable indicator of future performance, though long-term returns can give an indication of the quality of the underlying businesses.
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iShares Global 100 ETF (ASX: IOO)
This fund provides broad exposure to a range of large international companies from various developed and emerging markets. While US companies are the most represented within the holdings, other countries with a weighting of more than 1% include the UK, Switzerland, France, Germany, and Japan.
The IOO ETF is invested in 100 of the world's largest global stocks in a single fund. Its biggest positions include Apple, Nvidia, Microsoft, Amazon, Alphabet and Broadcom.
I think the businesses within this ETF are some of the strongest in the world, so it's not surprising to me that the IOO ETF has returned an average of 15.2% per annum over the past decade.
These companies continue to expand globally and reinvest in their product/services, so I think they can continue to deliver pleasing returns in the long term if their collective profit continues growing at a solid rate.
BetaShares Australian EX-20 Portfolio Diversifier ETF (ASX: EX20)
Most Aussies have probably heard of the biggest ASX 200 shares, like BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Telstra Group Ltd (ASX: TLS) and Woodside Energy Group Ltd (ASX: WDS).
However, generally, smaller businesses may have the potential to grow more than large businesses because they're not as far along in their growth journey.
This EX20 ETF ignores the biggest 20 businesses and invests in the next 180 largest businesses. I'm going to call these mid-cap businesses compared to the ASX large caps.
At the moment, its biggest positions are in companies like Brambles Ltd (ASX: BXB), Suncorp Group Ltd (ASX: SUN), Xero Ltd (ASX: XRO), Resmed CDI (ASX: RMD) and WiseTech Global Ltd (ASX: WTC).
Although this ETF isn't 10 years old yet, the index it tracks has returned an average annual return of 9.3% over the past decade, which is stronger than the IOZ ETF.
VanEck MSCI International Small Companies Quality ETF (ASX: QSML)
As I've mentioned, small businesses can outperform larger ones if they have a long growth runway. So, why not consider a fund full of high-quality global small caps? That's exactly what this fund does.
It owns 150 small caps from developed markets, which have a high return on equity (ROE), earnings stability, and low financial leverage. In my view, those factors result in a strong portfolio.
This fund is also not yet 10 years old, but the index it tracks has returned an average of almost 16% per annum over the last decade. Its annual management fee of 0.59% seems reasonable to me.
