Building a portfolio of ASX shares can be tricky. Most investors who buy individual stocks have to consider various factors, including their number of holdings, diversification across sectors and markets, and, of course, buying the right companies.
The complexity of maintaining this balance drives many investors into ASX ETFs.
ETFs, particularly index funds, allow investors to automatically diversify their portfolios across entire markets. For example, buying just one index fund, say the iShares Core S&P/ASX 200 ETF (ASX: IOZ), instantly exposes an investor to the largest 200 companies on the ASX.
That's everything from banks like Westpac Banking Corp (ASX: WBC) and miners like BHP Group Ltd (ASX: BHP) to telco Telstra Group Ltd (ASX: TLS) and supermarket operator Woolworths Group Ltd (ASX: WOW). All in one easy investment.
I think buying just one country-specific ASX ETF doesn't quite hit the level of diversification that would be most beneficial for the majority of investors though. So if you're looking for an easy, hands-off, passive investing portfolio, these are the three ASX ETFs I would buy to that end.
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3 ASX ETFs to build a diversified portfolio with
Vanguard Australian Shares Index ETF (ASX: VAS)
Rather than going with the IOZ ETF mentioned above for exposure to the Australian stock market, I would go with this offering from Vanguard. Rather than covering the largest 200 Australian companies, VAS instead goes further by holding the largest 300.
I think this is beneficial as it dilutes the exposure to the largest stocks on our market (mostly banks and miners) and increases our diversification with an additional 100 holdings at the bottom end.
Australian index funds are particularly appealing because they habitually provide high levels of dividend income (and franking credits). The Vanguard Australian Shares ETF is no different and is an easy choice for our first ASX ETF in this portfolio.
iShares S&P 500 ETF (ASX: IVV)
When an index fund is endorsed by the legendary Warren Buffett, it's hard not to include it in a diversified portfolio. Just as VAS covers the largest 300 shares on the ASX, this ETF from iShares tracks the largest 500 shares on the American markets.
This index is jam-packed with names we all know well. Of course, there are the tech titans like Apple, Microsoft, NVIDIA, Amazon, and Google-owner Alphabet. But IVV also covers companies like Coca-Cola, Visa, Ford, Colgate-Palmolive, and Costco.
The United States is simply home to most of the world's best businesses. It's fair to say that the ASX, whilst home to many great businesses, simply cannot compete with the names above for their global dominance and relevance to our modern world. As such, I think it's a great idea to put IVV alongside VAS in our diversified ASX ETF portfolio.
Vanguard All-World ex-U.S. Shares Index ETF (ASX: VEU)
So we've got Australia and the United States covered pretty well. But this final ASX ETF from Vanguard fills the remaining gap in our portfolio well.
Put simply, this fund invests in the world's largest companies outside the United States. Its holdings hail from advanced economies like Japan, the United Kingdom, and Germany, as well as emerging markets like India, Mexico, and Thailand.
This ASX ETF holds a whopping 3,835 individual underlying holdings. Some of its largest positions include Taiwan Semiconductor Manufacturing Co, Tencent Holdings, Toyota Motor Corp, and ASML Holdings.
Together with VAS and IVV, VEU adds a lot of geographic and economic diversification, and fills the third port in our simple, passive portfolio well.
Foolish takeaway
I think these three ASX ETFs are perfect candidates for a simple investing portfolio that any investor can build on a dime. The allocations to each fund are up to individual investors. But whether it's a third in each, a 40-40-20 allocation, or some other permutation, I don't think you can go wrong with these high-quality index funds for long-term investing.
