Exchange-traded funds (ETFs) seem to be all the range at the moment – and why shouldn't they be?
ETFs cut out a lot of paperwork by allowing investors to trade directly through a stock exchange like ASX Ltd (ASX: ASX).
One of my favourite topics to try to help Australian investors who have Aussie index (or index-like) products is to consider how un-diversified they actually are.
An unhealthy amount of the Australian index is allocated to Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ). A lot of money is allocated to banks focused mainly in Australia and Zealand.
I believe Aussie investors need to get more geographical diversification and industry diversification. That's why I believe these two ETFs are good options:
Vanguard MSCI Index International Shares ETF (ASX: VGS)
Vanguard is one of the world's best ETF providers thanks to its extremely low cost offerings. This particular ETF is a good investment option because it provides exposure to essentially the whole global share market with holdings in North America, Europe and Asia.
Although owning just one share perhaps isn't the best idea, this ETF is one of the ones you could do that with because you're actually getting exposure to over 1,500 businesses.
Its top holdings are the world's biggest businesses like Apple, Alphabet (Google), Facebook, Amazon and so on. However, they are not big percentages of the overall holding. If you want more FAANG shares then the below index could be a better choice.
BETANASDAQ ETF UNITS (ASX: NDQ)
This index gives exposure to the 100 biggest technology shares on the NASDAQ. Its top holdings are also Facebook, Apple, Alphabet (Google), Amazon and so on, however they are much bigger holdings in the ETF.
At the end of June 2018 11.4% of the ETF was devoted to Apple, 10.3% to Amazon, 9.5% to Microsoft, 9.1% to Alphabet and 5.8% to Facebook.
In the western world it is very hard to find blue chip businesses that are generating as much revenue growth as these technology businesses.
There are risks attached, as Alphabet's recent 4.3 billion euro fine from the EU shows. However, as a group I can't think of another five blue chips that I'd want more of than this ETF's biggest holdings.
Most Australians don't have enough of a technology exposure in their portfolio and I think this is a good way to increase that diversification.
Foolish takeaway
These ETFs can happily sit among your other individual ASX share holdings as good diversification options. The NASDAQ ETF may outperform most benchmarks quite comfortably over the next decade with how the world is becoming increasingly technological.
