Some ASX exchange-traded funds (ETFs) can provide investors with excellent diversification because they can offer hundreds or even thousands of businesses with just one investment.
I applaud anyone who takes their first steps investing, whether that's a business like Coles Group Ltd (ASX: COL), Xero Limited (ASX: XRO), or any other individual company. But a portfolio of 100 businesses probably provides more safety than an individual company.
With that in mind, the two ASX ETFs I'm going to tell you about are invested in thousands in businesses.
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Vanguard US Total Market Shares Index ETF (ASX: VTS)
This is a key Vanguard fund offering investors access to the US share market. But, instead of just being invested in 200 or 500 names, it was invested in 3,895 holdings as of 30 April 2023. That's a huge amount of diversification.
Yet, despite being invested in so many different businesses, it has an incredibly cheap annual management fee of 0.03%, which is essentially nothing.
Readers have probably heard of the largest positions in the portfolio including Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Berkshire Hathaway, and Meta Platforms (formerly Facebook).
I like that more than a quarter of the portfolio is invested in the IT sector. This is typically where businesses with stronger growth potential and/or better margins can be found.
While past performance is not a reliable indicator of future performance, over the last five years, the Vanguard US Total Market Shares Index ETF has returned an average of 13.5% per annum.
Vanguard Diversified High Growth Index ETF (ASX: VDHG)
Most ASX ETFs represent a portfolio of businesses, but this investment is a portfolio of investment funds, so there's significant diversification.
The VDHG ETF is invested in seven funds. These cover Australian shares, international shares, a hedged international fund, small international shares, emerging markets shares, global funds, and Australian bonds.
In total, shares make up 90% of the portfolio and bonds make up 10% of the portfolio. The three biggest allocations, at the time of writing, are: Australian shares (35.2%), international shares (27.3%), and international shares hedged (16%).
Due to the nature of the holdings, it hasn't done anywhere near as well as the VTS ETF. Right now, it has an average return per annum of 7.5%.
With the amount of diversification on offer with this ASX ETF, it comes with a very reasonable management fee of 0.27% per annum. Investors could utilise this investment to harness the diversification they may want, but I'd guess other investments could deliver stronger growth.
