2 ETFs to buy for strong diversification

The below two exchange-traded funds (ETFs) offer investors very strong diversification, including iShares S&P 500 ETF (ASX:IVV).

| More on:
A businessman holding a world globe in one hand, representing global investment.

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

Exchange-traded funds (ETFs) are a really good way for investors to get strong diversification through a single investment.

Some ETFs only give exposure to a few dozen shares, whilst others give exposure to a few hundred or even thousands of shares.

However, more investments in a portfolio can lead to slightly smaller returns. So, the below two investments are potential ideas for good returns and very strong levels of diversification:

iShares S&P 500 ETF (ASX: IVV)

A S&P 500 fund is one of Warren Buffett's favourite ideas to talk about for investors because of its low fees, good returns and solid diversification.

This investment gives investors exposure to 500 businesses that are listed in the US. These are among the biggest, best and most profitable companies listed there.

You do get exposure to the biggest names, with its top holdings being some of the biggest companies in the world such as: Apple, Microsoft, Amazon, Facebook, Alphabet, Berkshire Hathaway, JPMorgan Chase, Tesla and Johnson & Johnson.

One of the main advantages with S&P 500 shares is that they are usually global companies in their sector. That means that it's not just a US ETF, but it's a globally-focused ETF. These businesses have huge addressable markets and have created very impressive profit margins because of how large they have become, benefiting from economies of scale.

Another of the main benefits of this ETF is how low the management fee is at just 0.04%. That means almost all of the return is left in the hands of the investors. Over the last decade this investment has created an average return per annum of just over 18% with a very diversified portfolio.

Vanguard Msci Index International Shares ETF (ASX: VGS)

Whilst the first ETF gives exposure to US-listed shares, this ETF is about most of the global share market. It's invested in every major share market including the US, the UK, France, Germany, the Netherlands, Japan and Canada.

In total, it's actually invested in more than 1,500 businesses. Whilst it's invested in the same global US names as the S&P 500, it is also invested in other major businesses like LVMH, ASML, SAP, Nestle, Unilever and GlaxoSmithKline.

The Vanguard Msci Index International Shares ETF has an annual management fee of 0.18% per annum. That's a bit more than the first ETF, but still cheaper than most other active fund managers.

The returns have been in the double digits over the longer-term. Over the last three and five years, the average return per annum has been 13.26% and 13.76% respectively.

However, whilst this ETF is more globally diversified than the S&P 500, it still has more than two thirds of the portfolio invested in US-listed businesses.

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

An older gentleman leans over his partner's shoulder as she looks at a tablet device while seated at a table.
ETFs

What is the Vanguard Australian Shares Index ETF (VAS) dividend yield?

This fund is known for paying sizeable income. But how big?

Read more »

Man looking at an ETF diagram.
ETFs

Why these ASX ETFs could be strong buys in August

Let's see why these funds could be worth adding to a balanced investment portfolio.

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Dividend Investing

Invested in ASX MOAT or other VanEck ETFs? It's dividend day!

Show us the money!

Read more »

female real estate agent stands proudly in front of house
ETFs

Can't break into the housing market? Here's 3 REIT ASX ETFs to consider

These three thematic funds focus on real estate 

Read more »

asx shares to buy and hold represented by man happily hugging himself
ETFs

5 fantastic ASX ETFs to buy and hold forever

These funds could be destined to deliver strong returns over the next decade and beyond.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
ETFs

The pros and cons of buying iShares S&P 500 ETF (IVV) units this month

Is this a good time to invest in this leading ETF?

Read more »

Ecstatic man giving a fist pump in an office hallway.
ETFs

5 ETFs to buy with $5,000 to build a winning portfolio

Let's see why these funds could help form a strong investment portfolio.

Read more »

A graphic illustration with the words NASDAQ atop a US city and currency
ETFs

5 reasons to buy the Betashares Nasdaq 100 ETF

This fund could be well worth a spot in your investment portfolio. But why?

Read more »