How to create a diversified investment portfolio with ETFs

The aim of many investors is to have a well diversified investment portfolio. Managed funds used to be a go-to option for investors looking for diversification, however, since ETFs have come on the scene this is changing. Here’s how you can create a diversified investment portfolio with ETFs.

What are ETFs?

Exchange traded funds (ETFs) have become very popular in recent years for accessibility, cost-effectiveness and transparency. For those new to ETFs, they are an investment security that typically tracks a stock index or sector. You can also get ETFs that track a commodity, bond or a range of assets. ETFs are traded on the stock market, and when you buy an ETF you are buying shares in a portfolio that tracks the yield and return of its corresponding index or asset.

What does it mean to have a diversified portfolio?

Diversification is a simple tool some investors use to help mitigate risk and achieve more consistent returns within their investment portfolio. A well diversified investment portfolio would have a mix of a different investment asset and span across different markets, locally and overseas. The idea being different assets, sectors and markets react in different ways.

For example, when shares go down often fixed income assets like bonds go up, potentially balancing out returns. This is the same for countries if there is a market downturn in Australia, it may not be the case in another country.

One benefit of ETFs is the ability to have a diversified portfolio with a single trade.

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Creating a diversified portfolio with ETFs

When creating a diversified portfolio you may want to consider gaining exposure to the four main asset classes: equities, property, fixed income and cash.

Cash ETFs

Cash ETFs can offer an attractive alternative to bank deposits and savings accounts as typically you’ll receive a higher return and without the need for an account at a separate financial institution. Some examples of popular cash ETFs include the iShares Core Cash ETF and Betashares Australian High-Interest Cash ETF.

Fixed Income ETFs

Currently, there are around 20 ETFs listed on the ASX that provide exposure to bonds and other fixed income assets. Fixed-income ETFs generally track a basket of bonds issued by a variety of domestic and international corporations. Some products offered by the major providers include the VanEck Vectors Australian Corporate Bond Plus ETF and the Vanguard Australian Corporate Fixed Interest Index Fund.

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Property ETFs

Property ETFs typically track the performance of domestic real estate investment trusts (A-REITs), but there are some that one that have exposure to international REITs markets, such as VanEck Vectors FTSE International Property (Hedged).

Equities

ETFs are most commonly known by investors for offering broad exposure to the stock market, and there are plenty to choose from. Domestically, ETFs such as iShares Core S&P/ASX 200 ETF provide access to the largest companies listed on the ASX. Adding ETFs like this to your portfolio could help to reduce the risks associated with selecting individual stocks.

ETFs also provide easy access to a number of geographic and thematic sectors not available on the ASX. For example, you can access regions such as Europe (iShares Europe ETF) and the US (BetaShares NASDAQ 100 ETF) in one transaction.

Another alternative

To make things even easier some online financial advisors, like InvestSmart and Six Park, have created a portfolio of ETFs for investors. And managed fund and ETF provider Vanguard also offer what they call Diversified Index ETFs, which invest across multiple asset classes in one ETF.

Why use ETFs to create your investment portfolio?

Deciding on what to invest in can be very stressful for some investors. Particularly with shares, where there seems to be endless companies to invest in. ETFs can simplify the decision-making process and remove the pain points around choosing individual investments. ETFs also provide an easy way to gain exposure to some of the trickier assets to get hold of like bonds and even gold.

Should you invest in ETFs?

While there seems to be an ETFs for all kinds of investors, they are not right for everyone. Before investing in ETFs consider your own personal circumstances, investment goals and tolerance for risk. If ever in doubt, consider seeking the advice of a professional financial advisor.

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