Exchange-traded funds (ETFs) can be a good way for beginners to invest in the share market as ASX ETFs can enable investors to achieve diversification through just one investment.
Think about this – if someone started with $0 in their portfolio and then bought Wesfarmers Ltd (ASX: WES) shares (the owner of Bunnings and Kmart), their entire portfolio would be in a single business. It could take a few more investments to become properly diversified.
However, if they were to buy an ETF, then that single fund comes with an underlying allocation to dozens, hundreds, or sometimes even thousands of holdings.
There are many opportunities in the global share market, which is why I think the two ASX ETFs below could be good starter options.
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Vanguard MSCI Index International Shares ETF (ASX: VGS)
I think this is one of the most effective ETF investments for the long term when it comes to diversification and returns.
For me, shares are the way to go compared to other asset classes. At last report, this fund from Vanguard had more than 1,400 holdings from a number of major developed countries such as the US, Japan, the UK, France, Canada, Switzerland, Germany, the Netherlands, and so on.
I like the quality and growth potential of the biggest holdings. Here, we're talking about names like Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Tesla, Meta Platforms, and Berkshire Hathaway.
Considering the level of diversification, the annual management fee is very reasonable at just 0.18% per annum.
Past performance is not indicative of future returns, but I think the VGS ETF has shown it can do well over the long term. In the past five years, it has achieved an average return per annum of 10.9%.
BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
There is a lot to like about the global share market, but some people may not want to own all of the shares in a portfolio like the VGS ETF.
Perhaps a beginner investor doesn't want to own fossil fuel companies, like Exxon Mobil, tobacco businesses like Philip Morris, or weapons producers like Lockheed Martin.
The idea of the ETHI ETF is that it excludes an array of different sectors and business practices that someone investing 'ethically' may not want exposure to.
There are 200 businesses in the portfolio from across the world that are seen as climate leaders in their industries. The companies are also chosen because they have gender diversity on their boards, no ethical concerns about their supply chains, and so on.
What's left is a portfolio of ethically screened large global stocks, including Nvidia, Apple, Visa, Mastercard, Home Depot, Toyota, UnitedHealth, Adobe, Salesforce, and ASML.
As you might expect with the amount of work that has gone into creating this portfolio, it has a more expensive management fee than the VGS ETF. The ETHI ETF annual fee is 0.59%.
It may be a coincidence but the ethically-focused ETHI ETF has delivered an average return per annum of 15.6%, outperforming the wider global share market, though we shouldn't expect outperformance, or that level of return, to continue.
I think both of these ASX ETFs are effective at what they do, though some beginner investors may feel better about owning the ETHI ETF — and it could deliver outperformance sometimes.
