So you want the ultimate level of diversification? Using ASX exchange-traded funds (ETFs), it can certainly be done.
Diversification can be a double-edged sword. All investors acknowledge the importance of hedging risks associated with single companies, markets, and currencies. After all, none of us knows what the future might have in store for us. However, ASX investors can also be in danger of 'over-diversifying', which can lead to sub-optimal returns.
Saying that, there are investors out there who prioritise capital protection over maximising their returns. For those investors, let's discuss how you can build the ultimately diversified $100,000 portfolio using only ASX ETFs today.
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Building a $100,000 ASX ETF portfolio for ultimate diversification
Getting to the ultimate level of diversification, we will need to spread out our portfolio across multiple asset classes, not just stocks.
However, in recognising the need to balance a portfolio between capital protection and meaningful returns, we will still be allocating 70% of our portfolio to stocks. For investors who are uncomfortable with this level of risk, you can always decrease that. Today, though, we'll use that as a benchmark.
Kicking things off, we'll allocate $20,000 to the Vanguard Australian Shares Index ETF (ASX: VAS). This index fund tracks the largest 300 shares on our market. That's everything from the big four banks and BHP Group Ltd (ASX: BHP) to Harvey Norman Holdings Ltd (ASX: HVN) and Coles Group Ltd (ASX: COL).
ASX shares have historically delivered compelling returns. Plus, you'll get some additional benefits from the franking credits that VAS provides.
Next, we'll supplement VAS with an additional $20,000 allocated to the iShares S&P 500 ETF (ASX: IVV). This index fund tracks the S&P 500 Index (SP: .INX), which, similarly to VAS, tracks the largest 500 shares listed on the US markets. The American stock market houses some of the world's best companies.
I think it would be negligent to ignore stocks of the calibre of Microsoft, Amazon, Alphabet, Netflix, Mastercard, Coca-Cola, and other world-dominating businesses that call the United States home. Exposure to the US dollar, although currently unfashionable, is also still prudent.
ASX ETFs for EAFE and emerging markets
We'll give a further $15,000 each to both the iShares MSCI EAFE ETF (ASX: IVE) and the Vanguard FTSE Emerging Markets Shares ETF (ASX: VGE).
These two ASX ETFs give us even more diversification by adding exposure to stocks listed in Europe, Asia, and emerging markets.
The iShares EAFE ETF tracks markets across Europe, Asia, and the Far East (EAFE). Most of its portfolio comes from Japan, the United Kingdom, France, and Germany. Its top holdings include ASML Holdings, Nestle, Shell, and Toyota.
Meanwhile, the Vanguard Emerging Markets ETF holds stocks from emerging markets, including China, India, Taiwan, Brazil, Saudi Arabia, and South Africa.
Both of these ETFs hold companies that aren't too prominent in most major ASX ETFs. As such, they add a healthy level of geographic and currency diversification to our portfolio.
So that's the 70%. What about the other 30%?
Bonds and precious metals
If you want true diversification for capital protection, you should look beyond stocks as an investment. So, for our last two ASX ETFs, we'll be adding exposure to bonds and gold.
These asset classes have traditionally offered returns uncorrelated with share markets. As such, they can be useful in a portfolio during stock market crashes and other disruptive events in global markets.
For bonds, we'll be allocating $15,000 to the Vanguard Global Aggregate Bond Index ETF (ASX: VBND). This fund holds bonds issued by a variety of governments around the world, as well as by some investment-grade corporations.
It offers exposure to everything from US Treasuries to British Gilts and bonds issued by McDonald's, Coca-Cola, and even the Commonwealth Bank of Australia (ASX: CBA). Investors will probably appreciate the reliable income that a fund like this can provide.
Finally, we'll be putting our final $15,000 into the Perth Mint Gold Structured Product (ASX: PMGOLD). This exchange-traded vehicle allows investors to buy units that have a direct correlation with the price of gold in Australian dollars. Gold has always been used as a safe haven for investors, providing protection against inflation, currency erosion, and global geopolitical and economic uncertainty. Investors are also attracted to its finite supply and inherent value.
Gold pays no yield. Even so, it has been one of the best-performing asset classes in recent years, thanks to ongoing global uncertainty. If you want to achieve the ultimate level of diversification, it makes sense to have at least some exposure to precious metals like gold in one's portfolio.
