If you are new to investing and the stock market, getting started can be intimidating. There's the jargon to get one's head around to start with. And if you get past that, the sheer number of different companies to invest in can be overwhelming for a beginner who might just want to pick one, two or three to get started. That's why I think any beginner investor should start with ASX exchange-traded funds (ETFs).
ETFs can be thought of as collections of different shares that trade under one overarching name (and ticker code). To illustrate, the most popular ETFs on the ASX are funds that hold the largest 200 or 300 companies on our stock market. That's everything from Woolworths Group Ltd (ASX: WOW) and Telstra Group Ltd (ASX: TLS) to Ampol Ltd (ASX: ALD) and JB Hi-Fi Ltd (ASX: JBH).
If an investor just buys one ASX 200 ETF, they are really investing in the 200 companies that the ETF holds. These companies are updated periodically, meaning the beginner investor doesn't ever have to worry about them again once they've bought the fund. If they don't wish to, of course.
So today, I'll discuss three ASX ETFs that are all a beginner investor needs to have a diversified portfolio of different stocks that will help to build real wealth over time. If an investor buys each fund, elects to reinvest all dividends received, and buys as many units (shares of ETFs) as they can, as often as they can, they are highly likely to increase their wealth dramatically over their lives. That's if the past hundred years are anything to go off.
3 ASX ETFs that are perfect for a beginner investor
First off, we'll start with an Australia-focused fund, the Vanguard Australian Shares Index ETF (ASX: VAS). This fund works as we discussed above. It holds the largest 300 shares listed on the Australian share market, with every name above included. Amongst many others. Australian shares have delivered healthy returns for decades, and this ETF is a great way to patriotically tap into that trend.
Next up, the iShares S&P 500 ETF (ASX: IVV) is a perfect addition to our portfolio. Instead of holding the largest 300 stocks on the Australian market, this fund holds the largest 500 listed over in the United States. The USA houses many, if not most of, the world's best businesses, hands down. With this ETF, you'll be indirectly buying companies ranging from Apple, Amazon and Microsoft to Coca-Cola Co, Mastercard and Ford Motor Company.
These are the companies that dominate global commerce, and, if legendary investor Warren Buffett is to be believed, will continue to do so. I think following Buffett's advice is a sensible path for any beginner investor, so this ASX ETF joins our portfolio.
Finally, we have another Vanguard ETF, the Vanguard All-World ex-US ETF (ASX: VEU). This ETF plugs the giant gap in our portfolios' diversification by branching out beyond just Australia and the US. And branch out it does. This ASX ETF holds thousands of underlying companies, hailing from dozens of different countries. These span from China, India, Brazil and Spain to Taiwan, Singapore, South Africa and Canada.
Over long periods of time, we sometimes see some markets thrive while others suffer. Holding this ETF mitigates some of that risk, as well as providing some potential protection if a country-specific issue affects the US or Australian economies.
Foolish takeaway
These three ASX ETFs together cover most corners of the global economy and form a well-diversified portfolio. All three are passive, hands-off investments that require little ongoing effort or even thought. That, in my view, makes them perfect choices for a beginner investor.
