If you’re looking for a simple way to construct a balanced investment portfolio, ETFs may just be the answer.
When building a balanced portfolio, most investors seek exposure to the four main asset classes – equities, fixed income, property, and cash.
One big barrier to entry for many investors is knowing exactly how and what to invest in. Choosing investments like individual stocks, can be overwhelming and understandably so. The seemingly endless opportunities and the pressure to ‘make the right choice’ can leave investors idle.
To simplify the decision-making process, it may be worth considering exchange-traded-funds (ETFs). As a simple, cost-effective investment vehicle that provides access to a basket of stocks, ETFs can remove pain points around choosing individual investments. By using a combination of ETFs with exposure to the four main asset classes, this can be a simple and straightforward way to build a strong, diversified portfolio at a low cost.
And, when refining your investment portfolio, an important consideration will be to incorporate both defensive and growth assets. The split between the two will depend on your investment goals and timeframe.
Here are some examples of ETFs that fit into the defensive and growth asset categories.
Cash and fixed income (or bonds) fit into the defensive asset class category. For those with a brokerage account, 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.
For investors exploring fixed income, there are currently around 25 ETFs listed on the ASX that provide exposure to this asset class. Fixed-income ETFs 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.
Property and equities (or stocks) are asset classes dedicated to capital growth and income and have a moderate-to-high risk profile.
ETFs are most commonly known by investors for offering broad exposure to the stock market, compiling a basket of ‘top’ stocks – whether the top 100, 200, or aligned to a particular investment theme or region.
Domestically, ETFs such as iShares Core S&P/ASX 200 ETF provide access to the largest companies listed on the ASX. These can be a strong addition to a portfolio as they typically reduce the risk associated with selecting single stocks.
As the appetite for global exposures continues to grow, ETFs can 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 a simple transaction.
The ETF universe is vast and rapidly growing, so make sure you do your research and compare the products available.
Regardless of your final investment choice, reviewing the Product Disclosure Statement is critical. Pay close attention to the fees, composition, and exposure the product provides to ensure it aligns with your personal wealth goals.
Cover image source: Yuganov Konstantin/ Shutterstock
This article was reviewed by our Content Producer Marissa Hayden before it was updated, as part of our fact-checking process.
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(iii) In some circumstances, trading can be suspended and in that event, unitholders will not be able to buy or sell units in that fund. There can be no assurance that there will always be a liquid market for units or a fund's investments.
(iv) ETFs are considered by ASIC to be complex financial products. Some are more complex and risky than others. The table(s) above include only funds that are passively managed and seek to track an index. Synthetic ETFs and Inverse ETFs are not included in the list above. For more information on ETFs and risks associated with them, see ASIC’s Moneysmart website at https://moneysmart.gov.au/managed-funds-and-etfs/exchange-traded-funds-etfs.
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