I love investing in ASX shares, in the stock of individual Australian businesses. I love the feeling of owning a small piece of a very large company, often one I can visit and buy from myself, and I certainly don't find it difficult to accept my share of its profits. I own many ASX shares within my investment portfolio. But I also own quite a few ASX exchange-traded funds (ETFs).
ETFs offer ASX investors something that few individual ASX shares can – instant diversification across entire sectors and markets. That makes them inherently useful to many investors, myself included. So today, let's discuss two of the ASX ETFs that I hold in my portfolio, and why.
Two ASX exchange-traded funds that I buy, and why
Vanguard Australian Shares Index ETF (ASX: VAS)
First up, we have the ASX's most popular ETF, and index fund, the Vanguard Australian Shares ETF. This fund is simple in nature, tracking the largest 300 shares on our stock market, and weighting them by market capitalisation. That's everything from Commonwealth Bank of Australia (ASX: CBA) and Woolworths Group Ltd (ASX: WOW) to Qantas Airways Ltd (ASX: QAN) and Medibank Private Ltd (ASX: MPL).
I invest in this ASX ETF for a few reasons. Firstly, it's a hedge against my potential inability to outperform the market. If it turns out my individual stock picking skills are lousy and generate sub-par long-term returns, this ETF (which is, in effect, 'the market') should help mitigate this potential underperformance.
Secondly, VAS helps diversify my portfolio. I am underweight in several sectors in my own portfolio, due to a lack of knowledge and interest. This includes mining and energy stocks, as well as financial companies. The Vanguard Australian Shares ETF is well exposed to both sectors, as well as most others. This helps to cover up the holes in my individual stock portfolio, as well as allowing me to enjoy at least some profits from the next mining boom.
VanEck Morningstar Wide Moat ETF (ASX: MOAT)
Next up, we have another ASX ETF in this actively-managed fund from VanEck. Unlike VAS, the VanEck Wide Moat ETF is not a broad-based index fund. Instead, it holds a portfolio of around 50 US stocks that are all selected on their perceived possession of a wide economic 'moat'. This term, originally coined by legendary investor Warren Buffett, refers to an intrinsic competitive advantage a company can possess.
This typically comes in the form of a powerful brand, a low-cost advantage, or making a product that is difficult to disrupt.
We can see this playing out in some of MOAT's current holdings. It's difficult to dispute the power of brands like Disney, Alphabet's Google or Nike. And it would be very difficult to start a company to rival the likes of Boeing, PepsiCo or Amazon.
I don't normally invest in actively-managed ASX ETFs like MOAT. However, I make an exception for this particular fund. That's primarily because it has the numbers to back itself. Over the 10 years to 31 May, MOAT has returned an average of 14.59% per annum. That is a return I would love to continue to enjoy in my ASX stock portfolio.
