2 of the top ETFs for diversification

These 2 ETFs could be really good options for diversification, including Vanguard Msci Index International Shares ETF (ASX:VGS).

| More on:
close up of buy, sell and etf keys on a computer keyboard

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are some really good exchange-traded funds (ETFs) that could be good options to provide diversification.

Why are they useful for diversification?

One of the main benefits of ETFs is that with just one investment you can buy a whole group of businesses. That can be really useful to gain diversification quickly.

There are some particular ETFs that provide excellent global diversification, which might be exactly what some ASX investors need:

Vanguard Msci Index International Shares ETF (ASX: VGS)

This ETF is about giving investors exposure to the global share market with businesses listed in developed countries.

Numerous markets are given allocations with this ETF including: the US, Japan, the UK, France, Canada, Switzerland, Germany, the Netherlands, Hong Kong, Sweden, Denmark, Spain, Italy and Singapore.

This ETF has over 1,500 holdings across all of those different countries, so it's extremely diversified. As its largest holdings, it has all of the major global US businesses including Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, JPMorgan Chase, Johnson & Johnson, Visa and Walt Disney.

It's also well diversified when it comes to sector allocation, with five sectors having a weighting of more than 10%: IT, financials, healthcare, consumer discretionary and industrials.

Over time, the best businesses will become larger parts of the portfolio and generate more of the return.

During the five years to 28 February 2021, the ETF generated average net returns per annum of 12.4% – that's after the annual management fee of 0.18% per annum.

According to Vanguard, the portfolio's return of equity (ROE) ratio is 15.9%. Its dividend yield is 1.8%.

iShares S&P 500 ETF (ASX: IVV)

In some ways, this investment is similar to the first one – it has a similar top holdings list of Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, Berkshire Hathaway, JP Morgan Chase and Johnson & Johnson.

But there are a few key differences. As the name might suggest, this ETF has 500 holdings – significantly less. This means that the weightings to the big tech companies is higher, if that's what you want. Also, all of the businesses are listed in the US.

With the iShares S&P 500 ETF, the cost is actually lower. It's one of the cheapest investment options on the ASX with an annual management fee of just 0.04%.

The low management fees and strong performance of the underlying shares has helped the ETF deliver net returns of 17.3% per annum over the last decade and a net return of 25.4% over the last 12 months.

As you might expect, the portfolio is more weighted to technology shares, with IT making up more than a quarter of the fund. The 'communication' sector, which includes Facebook and Alphabet, makes up another 11.2% of the portfolio.

Bearing in mind the effects of COVID-19, the trailing yield of the ETF over the last 12 months has been 1.24%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended iShares Trust - iShares Core S&P 500 ETF and Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ETFs

A young man punches the air in delight as he reacts to great news on his mobile phone.
ETFs

5 excellent ASX ETFs to buy now

Here are five funds that could be top picks for Aussie investors this month.

Read more »

Business people discussing project on digital tablet.
ETFs

Should you invest $3,000 into these top ASX ETFs this month?

Is now a good time to buy these funds? Let's find out.

Read more »

ETF spelt out with a piggybank.
ETFs

Is it too late to buy the VTS ETF and MOAT ETF after the rebound?

Was the best time to buy these ETFs last month?

Read more »

Hologram of a man next to a human robot, symbolising artificial intelligence.
ETFs

AI, cybersecurity, and defence: 3 megatrend ASX ETFs to watch now

Want to invest in some of the most exciting megatrends? Check out these funds.

Read more »

A business woman flexes her muscles overlooking a city scape below.
ETFs

3 ASX ETFs that could be strong buys in May

Looking for some investment ideas? Here are three to consider in May.

Read more »

Army man and woman on digital devices.
ETFs

3 reasons why Vaneck Global Defence ETF could beat the ASX 200 over the next year

Let's take a look at why this fund could be a top pick for investors.

Read more »

Five young people sit in a row having fun and interacting with their mobile phones.
ETFs

5 ASX ETFs to buy and hold until 2035

Check out these funds if you are looking to make buy and hold investments.

Read more »

Excited couple celebrating success while looking at smartphone.
ETFs

3 strong ASX ETFs to buy in May

These funds could be top picks for Aussie investors next month. Let's see why.

Read more »