Article originally published April 21, 2020. Last Updated: 27 January 2021
It's been almost 45 years since American Jack Bogle founded the Vanguard Group and launched the very first index fund. The launch of the Vanguard 500 Index Fund got off to a rather inauspicious start, only raising $11 million – less than 8% of the $150 million goal – and leading many in the investing community to call it "Bogle's Folly".
But over the past 2 decades, investing through index funds has become the default wealth-building tool for millions of investors worldwide.
And none other than Warren Buffett credits Bogle as having done more than anyone else for the average investor on the street.
There's little to argue within that statement. Index funds have driven down the costs of investing, as well as improving returns, for the average person. The idea is simple: instead of paying a fund manager a handsome annual fee to pick stock for you (which most aren't very good at), you would pay a relative pittance and get 'the whole market' instead – all 500 of the biggest companies in America, the winners and the losers.
This approach often ends up costing the average investor far less in fees (it's a lot cheaper to blindly follow the market than pay a stock picker), which ends up more than making up for most fund managers' abilities to achieve any meaningful outperformance of the 'whole market' anyway.
When Bogle first launched Vanguard, the index fund was only offered through a mutual fund structure (or 'managed fund' as we Aussies like to say). But since 1993, index investing has been dominated by a new investment structure – the exchange-traded fund (ETF).
Instead of having to work outside the confines of the stock exchange (like a mutual fund does), ETFs offer their units (or 'shares') on the market, alongside all of the stocks that make up the index itself. This further reduces costs for the provider and subsequently allows even lower fees. Other advantages include less complexity, easier trading and higher transparency.
Here in Australia, we were a little late to the ETF party. The first Aussie ASX ETF only launched in 2001 – a good 25 years after Jack Bogle first launched his 'folly'. This ETF – the SPDR S&P/ASX 200 Fund (ASX: STW) – is still going today, but has been joined by countless other funds in what has grown to become one of the most powerful investing trends of the century (perhaps even of all time).
So which are the best choices? What exactly is an index and how does it relate to an ETF? We'll answer those questions below and share the top ETFs for 2020 and beyond.
Table of Contents
What is an index?
An index is a collection of shares, bonds, or other asset classes based on certain criteria and weighting. For instance, the S&P/ASX 200 Index (ASX: XJO) is an index of approximately 200 of the largest Australian public companies. The companies included can (and do) change from year to year, as companies merge, go private, get acquired, or simply find themselves surpassed by smaller companies that have gotten bigger. There are indexes for just about every industry: indexes tracking small-cap, high-growth stocks; indexes tracking shares that pay high dividends; indexes tracking just banks or oil companies; indexes of shares in other countries or even multiple countries. The list goes on and on. And that's just shares. There are also indexes for bonds, cash, commodities, and even currencies. For the sake of clarity, this article will focus on ETFs that we Fools think most retail investors should own: the ones that track shares.
What is an index fund?
An index fund is a financial instrument you can buy to own a stake in all of the components of a specific index. Each index fund tracks a specific index of stocks, bonds, or other financial assets. If you invest in an S&P/ASX 200 index fund, you'd actually own a small piece of each of the 200 components of the ASX 200, and your returns would very closely match that index. That's how it works for every other index fund, too.
The fund manager who runs the fund allocates the investments in the fund to match the construction of the index the fund tracks, collecting a fee – called the expense ratio and expressed as a percentage of the assets held – to cover expenses (and sometimes to make some profit) to run the fund. The fund is then broken up into 'units' (or shares) and sold directly to investors at the price that all the pieces of the fund put together are worth.
Index managed funds vs. index ETFs
At their core, shares of an index managed fund and an index ETF are essentially the same thing: A stake in a broad collection of the stocks or bonds that mirror a particular index. They differ in how and where investors can buy and sell them:
- A managed fund doesn't trade on a stock market; it's generally purchased directly from the fund manager, or through brokering services or wrap providers.
- An exchange-traded fund can be bought and sold on a stock exchange, just like any other share.
Because ETFs trade on stock exchanges, they are highly liquid, and you can buy and sell them (generally within seconds) during regular market trading. Managed funds are far less liquid, because buying and selling doesn't take place on a market between investors, but directly with the fund.
Furthermore, the fees investors pay when buying or selling a mutual fund are different than with an ETF. With an index mutual fund, you typically pay no brokerage up front and are also less restricted by how much you can invest at any particular time. However, you may be charged a fee on any money entering or exiting the fund, or else required to hold your investment for a minimum amount of time.
With an index ETF, given you're buying and selling on a stock exchange, you can trade as often as you like, but you'll have to pay whatever commissions or fees your broker charges for each trade.
What are the pros and cons of ETFs?
Why choose an ETF, instead of a fund run by a manager who actively chooses the stocks or other assets in which the fund invests? In short, because the majority of managed funds underperform their benchmark index. At the same time, they charge expenses that can be double or triple what you'd pay for an index fund or ETF. The evidence is undeniable: Passively managed index funds outperform actively managed funds to an overwhelming degree – both from one year to the next, and over the long term. Simply put, ETFs are more likely to make you more money over a long period of time.
Furthermore, ETFs also provide a great way to diversify, whether it's across a broad selection of stocks like the ASX 200, within an industry, or across a category of shares. Compared to picking just a few individual stocks, this diversification can significantly reduce your risk of permanent losses from a single company going under.
Another great thing about ETFs is their 'self-cleansing' nature. Because an ETF continually and automatically adjusts its holdings, companies that grow are automatically added to and companies that flail are sold-off over time. In this way, ETFs can be used as a truly passive investment. You can literally buy and forget.
At the same time, index investing has drawbacks. Chief among them is that by indexing, you're settling for average returns – literally average. Sure, outperforming the stock market isn't easy, but it's not impossible. Eschewing individual stocks for ETFs can reduce some downside risk, but also caps your potential returns to the combined results of a big basket of companies.
Fortunately, there's no law requiring you to choose only one path or the other; plenty of successful investors use a combination of ETFs and individual shares to fit their personal investing goals.
What are the different kinds of ETFs?
While there are hundreds of different index funds in which you can invest, they generally fall into one of the following groups:
- Market-tracking ETFs
- Strategy ETFs
- Commodity or currency ETFs
Market-tracking ETFs
By far the most common and popular type of ETF, these funds generally fall into broad categories based on broad stock-market indexes, such as the ASX 200 or the US S&P 500. Market-tracking ETFs can also focus on specific geographical regions, such as emerging markets, or more broadly represent the entire global economy.
The first thing to understand about any share market-tracking ETF is that these funds will be volatile. Because the aim of the fund is to blindly follow 'the market', there will be no efforts to limit any losses, or mitigate risk of any kind. That means market-tracking ETFs often suffer large falls in stock market crashes and may stay that way during bear markets. There is no protective cash position in an ETF nor any attempt to 'buy low, sell high' like you may get with an active fund. You simply accept the cold, hard market for all its flaws.
However, market-tracking ETFs also generally recover very quickly from crashes and bear markets, and then continue to deliver positive gains, making them an ideal asset for building long-term wealth. The key is not selling in a panic at the first sight of a drop, instead maintaining a long-term focus and holding accordingly when everyone else is selling on short-term fears. Jack Bogle used to have a simple mantra for index investing for this reason: 'stay the course'.
Strategy or sector ETFs
Sector/strategy ETFs (also sometimes called 'active' ETFs) are similar, but not quite the same as market-tracking ETFs. Instead of 'buying everything' like a market-tracking ETF does, a strategy/sector ETF tracks an index that aims to fulfil a specific need or exposure for an investor.
This might be exposure to only certain kinds of companies within a sector (biotech, property REITs, banking, gold mining, health care or cybersecurity shares, for instance), or else only investing in companies that pay large dividends.
Alternatively, a strategy ETF might only focus on buying companies that can be classified as 'growth' shares or 'value' shares.
Many investors like the concentrated simplification of these kinds of ETFs, but other investors don't bother with sector or strategy ETFs because they feel the passive nature of what traditional indexing is all about has been removed. You aren't buying 'everything' anymore, you're actively picking an area to invest in, and thus the 'whole market' approach is lost.
Because of this increased oversight and narrower concentration, strategy ETFs often attract higher management fees than their market-tracking counterparts – something to keep in mind!
Commodity/currency ETFs
These kinds of ETFs are the most specific and perhaps the most niche of funds. Many investors might never invest in them, or else might only hold them for a few months for a tactical or hedging position. Commodity and currency ETFs are traded on the stock exchange, but instead of tracking companies, they represent a direct investment in a currency or commodity.
These might be backed by a physical store of the commodity or currency in question (such as gold bullion in a vault, or US dollars in a bank account), or alternatively by using derivatives such as futures contracts to gain exposure.
Either way, these ETFs don't follow any kind of 'indexing' investment strategy and thus don't provide a tried-and-true pathway to long-term wealth creation. As such, this is an ETF sector we won't be covering too heavily today. The fees are also usually substantially higher than other kinds of ETFs.
How do you know which index funds are right for you?
At the end of the day, it really depends on your own personal investing strategy, goals and risk tolerances. An ETF might suit one investor down to the ground, but be completely inappropriate for another.
For instance, an ASX 200 or ASX 300 fund is an excellent investment, and one that nearly every kind of investor at every life stage could comfortably own shares of.
But for people who are already retired and counting on their investments for income today, having all of their assets in shares through an ASX 200 ETF might not be the most appropriate choice for that investor. Such an investor might find a mixing an ASX 200 fund with a dividend-focused ETFs or even ETFs that invest in cash, property, gold, or bonds might align with their priorities better.
On the other side of the same coin, young investors might be unhappy with having so much of their wealth concentrated in the banking and mining stocks that dominate the ASX 200. As such, many young investors might find a growth-orientated ETF more to their liking, or perhaps a mixture of ETFs that invest in small-cap companies or even other markets around the world.
Everyone has a different investing mindset and different goals based on what stage of life they are currently in – selecting ETFs that reflect this is very important.
There is no right answer either. You can be happy and successful with 1 ETF or 10, with just the Australian market or a portfolio that covers the whole world.
So let's now take a closer look at 6 top ASX ETFs that we think have a place in just about every ASX investor's portfolio. These 6 ETFs have relatively low expense ratios (or fees), with all 6 coming in at under 0.7% (that's under $7 per year for every $1,000 invested). Some might suit you, some might not, but all are worthy of consideration on merit in our view.
The top ETFs for 2021
| ETF | Expense ratio (%) | Number of holdings | Description |
| iShares Global Consumer Staples ETF (ASX: IXI) | 0.46% | 106 | Global 'sector' ETF focusing on large-cap companies within the consumer staples sector |
| VanEck Vectors Wide Moat ETF (ASX: MOAT) | 0.49% | 49 | US-focused 'strategy' ETF following companies that have identified long-term competitive advantages |
| Betashares Global Cybersecurity ETF (ASX: HACK) | 0.67% | 40 | Global 'sector' ETF focusing on exposure to companies within the cybersecurity space |
| BetaShares Nasdaq 100 ETF (ASX: NDQ) | 0.48% | 100 | Market-tracking ETF focusing on the largest 100 companies in the tech-heavy US Nasdaq Index |
| Vanguard MSCI Index International Shares ETF | 0.18% | 1532 | Market-tracking ETF focusing on the largest companies internationally in developed countries |
| BetaShares Asia Technology Tigers ETF (ASX: ASIA) | 0.67% | 50 | Asia-focused 'sector' ETF following the 50 largest technology and online retail stocks in Asia (excluding Japan) |
iShares Global Consumer Staples ETF (ASX: IXI)
Our first ETF is one that we think is a great pick during these uncertain times. IXI tracks a global sector of companies that produce products known as consumer staples. In other words, these are products that most of us can't live without. This includes everything from packaged foods and drinks to household essentials like soap, toilet paper and razors. 'Sin stocks' like alcohol and tobacco companies are also considered consumer staples, as are supermarket/grocery companies.
We think this ETF is a great choice, especially for those more conservative investors who might be seeking to minimise risk and volatility in their portfolio. As we have seen during the coronavirus crisis, consumer staples companies have been a rock of safety for many investors, as sales have held up or even increased as customers stock up on essentials. In this way, we think this ETF can form the bedrock for a more conservative investor's portfolio – and one that offers plenty of the 'sleep well at night' factor.
Many of the companies in IXI pay dividends as well.
Below, you can see how the top 10 holdings of this ETF stack up:
| Stock | ETF allocation |
| Proctor & Gamble | 8.92% |
| Nestle SA | 8.78% |
| Coca-Cola | 4.43% |
| PepsiCo | 4.43% |
| Unilever PLC | 4.39% |
| Walmart | 4.39% |
| Costco Wholesale | 4.30% |
| Philip Morris International | 3.57% |
| Diageo | 2.60% |
| L'Oreal SA | 2.43% |
| Remaining holdings | 51.76% |
As you can see, this list is dominated by a range of global companies that make a diverse range of household or staple goods.
Nestle is the world's largest producer of foods with brands like Maggi, Nespresso and Uncle Toby's. Proctor & Gamble is famous for Gillette razors, Fairy dishwashing products, Old Spice deodorant and Pantene shampoo.
PepsiCo and Coca-Cola don't need too much introduction, whilst Walmart and Costco are 2 of the largest supermarket companies in the world.
Interestingly, our own Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) also feature in this ETF.
Even though 51.1% of this ETF's holdings are listed in the United States, these companies have a truly global presence, and as such I consider this ETF to be sufficiently diversified enough to give true global exposure.
Below, you can see a snapshot of this ETF's performance and returns on an average annualised basis:
|
| 1 year | 3 years | 5 years | 10 years |
| Return (%) | 7.61% | 5.86% | 7.13% | 9.03% |
As you can see, this ETF isn't going to make anyone vastly wealthy in a short amount of time. But the stability, diversification and defensive nature of this ETF should hopefully more than compensate for this for many investors.
VanEck Vectors Wide Moat ETF (ASX: MOAT)
This ETF is a little different from the others in our list as it is the only one to follow an investment 'strategy' rather than a sector or market. Its strategy goes something like this: "exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages".
Warren Buffett actually coined the term 'moat', when explaining what he likes to look for in a company. He describes a moat as a barrier or obstruction to a business'' competitors that stops them from being able to 'storm the company's castle'.
Over the long-term, if a company possesses a moat, it is more likely to be able to charge higher prices and maintain market share – 2 things that invariably lead to both higher shareholder returns and resilience to external shocks or threats in the economy.
These moats can come in a few forms, including a trusted brand, holding a monopoly in an industry or just being able to charge consistently lower prices that competitors. But the companies that this ETF aims to hold are judged to have at least one form of a 'moat'.
Because of its 'Buffett-esque' philosophy, this ETF is already off to a good start. But let's have a look at some of the companies that make up MOAT's holdings:
| Stock | ETF allocation |
| Schwab (Charles) Group | 3.25% |
| Wiley (John) & Sons – Class A | 3.06% |
| Corteva Inc | 3.02% |
| Wells Fargo & Co | 2.84% |
| Cheniere Energy | 2.78% |
| US Bancorp | 2.72% |
| Intel Corp | 2.65% |
| Constellation Brands | 2.61% |
| Aspen Technology | 2.58% |
| Zimmer Biomet Holdings | 2.56% |
| Remaining Holdings | 71.93% |
You may notice that MOAT's holdings are far more evenly weighted than other ETFs. That's because MOAT aims for an 'equal weighting' allocation for each of its holdings, rather than weighing according to company size. Because of this, it's also worth highlighting some more famous names in the MOAT stable that aren't on the list above, such as Facebook, Nike, Microsoft and Warren Buffet's own Berkshire Hathaway.
As you can see, there are some world-class companies within this ETF.
Amazon's moat is fairly obvious as having arguably the cheapest, largest and fastest online marketplace on the internet.
Kellogg is famous around the world for its cereal brands like Corn Flakes and Coco Pops.
Pfizer possesses many patents and brands of pharmaceuticals most of us use regularly, such as Robitussin.
BlackRock is the second-largest provider of ETFs and asset management services in the world after Vanguard. You might not have noticed, but the iShares Global Consumer Staples ETF discussed above is a BlackRock fund.
All in all, these are the kinds of companies that dominate their fields, have enormous pricing power, a global presence and typically have a long history of delivering for their shareholders.
But let's see how the bite stacks up to the bark with this ETF:
|
| 1 year | 3 years | 5 years | 10 years |
| Return (%) | 4.31% | 15.57% | 16.58% | N/A |
Despite the 2020 stock market crash, MOAT's performance metrics have held up very well. In this way, we think this ETF shows its value for an ASX portfolio.
It is worth noting that this performance does include currency fluctuations between the US dollar and the Australian dollar. The Aussie dollar has spent most of the last decade falling in value against the greenback, which has boosted returns from this ETF in the longer term but has worked against it more recently.
However, you are getting both diversity and quality through companies with strong track records, which we think makes MOAT more than worthy of inclusion in the 'Top ETFs for 2021'.
BetaShares Global Cybersecurity ETF (ASX: HACK)
The aptly named, 'HACK' ETF from BetaShares, is a sector-focused play on the growing cybersecurity market. Once an afterthought, cybersecurity is starting to garner more attention. This comes after a substantial increase in cyber attacks and an increase in the importance of the entities being targeted.
Last year, we witnessed the New Zealand Stock Exchange impacted by a distributed denial of service (DDoS) attack, US software provider SolarWinds breached by hackers, high-profile Twitter accounts such as Elon Musk and Jeff Bezos hijacked by Bitcoin scammers, and this is just scratching the surface.
Cybersecurity Ventures estimated that during this year, globally we will experience a ransomware attack every 11 seconds. This would indicate a nearly 11-fold increase in the number of attacks since 2015 when it was estimated to be a ransomware attack every 2 minutes.
Unsurprisingly, with the extent of damages from this increasing problem, governments around the world are initiating large programs to help address the issue. There are many cybersecurity companies set to benefit from this targeted focus, including the below top 10 holdings in the HACK ETF.
| Stock | ETF allocation |
| Crowdstrike | 7.5% |
| Zscaler | 7.0% |
| Cisco Systems | 5.4% |
| Accenture | 5.4% |
| Splunk | 4.3% |
| FireEye | 3.7% |
| Proofpoint | 3.4% |
| Palo Alto Networks | 3.2% |
| Sailpoint Technologies | 3.2% |
| F5 Networks | 3.1% |
| Remaining Holdings | 53.8% |
You likely won't recognise many names in the holdings list. Most of these companies provide business grade cybersecurity solutions for other companies, not consumers – so, not too many household names here.
Our options for investment in cybersecurity companies locally on the ASX are few. Most of the large global cybersecurity companies are US-based, and this is reflected in this ETF – over 88% of holdings are US companies. However, many of these companies have a global presence.
Companies like Crowdstrike are at the forefront of cloud-based cybersecurity software-as-a-service. The company utilises artificial intelligence and machine learning to detect attacks rather than relying on the host computer's processing power.
There are other aspects to cybersecurity than monitoring and prevention software. Network infrastructure and telecommunications are fundamental dimensions of cyberspace. Cisco Systems stands out as a leader in network and communications hardware. On top of this, Cisco has also been building out its software offering in recent years, demonstrated by a long list of acquisitions.
Let's see if the increasing trend in cyberattacks tracks with this ETF's performance:
|
| 1 year | 3 years | 5 years | 10 years |
| Return (%) | 36.75% | 25.65% | N/A | N/A |
While HACK's track record is short, its dominating performance so far is a good indicator of what could be to come.
The sparse selection of cybersecurity companies listed on the ASX makes it difficult to gain diversified exposure to the sector. This ETF provides simple access to an assortment of the highest quality cybersecurity companies in the world in a single trade.
BetaShares Nasdaq 100 ETF (ASX: NDQ)
We are back to a market-tracking ETF with this fund from BetaShares. The US (unlike most countries) has more than 1 stock exchange. The 2 major exchanges are the New York Stock Exchange (NYSE) and the Nasdaq. The Nasdaq is a newer exchange and as such, many newer companies choose to list on it. This means the Nasdaq index is far more 'tech-heavy' and internet-focused than other US indices like the Dow Jones Industrial Average or the S&P 500.
And it's this quality that makes an investment in NDQ very desirable – especially for ASX investors who follow a growth-orientated strategy.
NDQ tracks the largest 100 companies on the Nasdaq exchange. Again, this is a market-tracking ETF, so if a company drops off the top 100, it is replaced in the ETF as well. Also, positions are allocated according to market capitalisation, so the largest companies are allocated the most weighting.
Ever heard of the FAANG stocks? FAANG is the acronym given to the 5 tech companies that dominated the 2010s: Facebook, Apple, Amazon, Netflix and Google (now Alphabet). All 5 of these companies are present in NDQ – but let's take a look at the top 10:
| Stock | ETF allocation |
| Apple | 11.8% |
| Microsoft | 8.9% |
| Amazon.com | 8.6% |
| Alphabet (Class A & Class C) | 6.3% |
| Tesla | 5.2% |
| | 3.4% |
| Nvidia | 2.6% |
| Paypal | 2.3% |
| Netflix | 2.1% |
| Intel | 1.9% |
| Remaining Holdings | 46.9% |
As you can see, this is also a fairly 'top-heavy' ETF, but with names like Microsoft, Apple and Amazon at the helm, I'm not sure this will concern too many investors.
One of the problems with our own ASX is the absence of names that truly command global power and dominance in the technology space. NDQ is a perfect antidote to this problem, with exposure to most of the companies that are arguably shaping the future of the internet, social media and online communication, as well as futuristic projects like AI and machine learning.
As such, 47.1% of NDQ's holdings are in the Information Technology sector, which is highly concentrated for a market-tracking fund. That means an investment in this ETF is a vote of confidence in the future of internet-based companies. You'll have to keep this in mind when considering NDQ as an investment.
So let's take a look at how this ETF has performed for ASX investors in recent years:
|
| 1 year | 3 years | 5 years | 10 years |
| Return (%) | 34.80% | 27.37% | 22.01% | N/A |
As you can see, this ETF has delivered a very lucrative performance for ASX investors in recent times, despite the 2020 stock market crash.
Note that (like MOAT), this performance does include currency fluctuations, which have helped boost returns. But even so, we think NDQ has proven its worth and earns its place as a 'top ETF for 2021'.
Vanguard MSCI Index International Shares ETF (ASX: VGS)
Our next exchange-traded fund is the Vanguard MSCI Index International Shares ETF. This market-tracking ETF provides access to a broadly diversified range of the world's largest companies listed in developed countries, excluding Australia.
If you want to quickly increase your geographical diversification, VGS is an off-the-shelf entry into 24 geographics including the US, Japan, United Kingdom, France, Canada, Germany, Switzerland, Netherlands, and Sweden.
It is easy for us to become heavily invested in what is familiar – this is known as home bias. The problem is, much like investing in only one company, there is a risk in putting all your eggs in one geographical basket. VGS holds 1,532 of the world's biggest companies across sectors such as tech, healthcare, consumer discretionary, and financials, removing the need to familiarise yourself with hundreds of foreign companies
It's worth mentioning that VGS is the cheapest ETF on our list for 2021. With a management expense ratio of only 0.18%, it will cost you just $1.80 for every $1,000 you have invested every year.
Another benefit to this ETF is its reasonable dividend distribution, with 2.47% being paid to holders in the last year. This passive income is reinvested, which we think makes it an excellent 'core' holding for compound wealth building.
Below, you can see how the top 10 holdings of this ETF stack up:
| Stock | ETF allocation |
| Apple | 4.51% |
| Microsoft | 3.81% |
| Amazon.com | 2.76% |
| Alphabet (Class A & Class C) | 2.09% |
| | 1.31% |
| Tesla | 1.05% |
| Johnson & Johnson | 0.82% |
| JPMorgan Chase | 0.77% |
| Visa | 0.73% |
| Procter & Gamble | 0.69% |
| Remaining Holdings | 81.5% |
As shown above, VGS' top 10 holdings are concentrated in the US and the top 5 reflect that of NDQ. In spite of this, the remaining 1,522 stocks that form 81.5% of the holdings are speckled with companies from other jurisdictions.
Examples of this include the London-listed fast-moving consumer goods producer Unilever. You might be familiar with some of Unilever's brands such as Dove, Rexona, Lipton, TRESemmé, and T2 tea.
Some recognisable Tokyo-listed companies include Toyota Motor Corp, Sony, Nintendo, Daikin, and Mitsubishi.
And let's not forget our European friends over on the Brussels stock exchange, with the likes of the world's largest brewer, Anheuser-Busch InBev.
A consequence of this ETF's global exposure is that the weighting of holdings beyond the top 210 are less than 0.1%. So just don't expect any one individual share to move the needle much.
Here's how this fund has performed in recent years:
|
| 1 year | 3 years | 5 years | 10 years |
| Return (%) | 5.80% | 11.26% | 11.03% | N/A |
The recent returns may not be dropping jaws, especially when compared to something like the S&P 500 Index, which returned around 18.7% in the last year.
Yet the value in global diversification is put in the spotlight when VGS's returns are compared to markets that haven't bounced back as strongly over the tumultuous past 12 months. For example, if you had strong home bias and only held the ASX 200 index, you would still be down roughly 3%. Even worse, an investment in the FTSE 100, the 100 largest London-listed companies, would still be down 10% (before dividends, expenses etc).
Hence, we think VGS provides an exceptional low-cost method of reducing volatility and risk associated with concentrating your capital in one geography. An important consideration that has been made evident with the events over the last year.
BetaShares Asia Technology Tigers ETF (ASX: ASIA)
When we think about tech and growth opportunities, most of us are all too quick to jump straight towards the US FAANG shares or Australia's WAAAX (Wisetech, Afterpay, Altium, Appen, Xero). But it is important to remember Asia is housing high-flying growth players of its own.
Tech companies in Asia benefit from an audience of consumers that are highly accepting and adaptable to emerging digital transformations. As reported by McKinsey & Company, the number of internet users in Asia has grown more than anywhere else in the world, now accounting for 50% of the world's total users. In addition to that, Asia's e-commerce market is nearly triple that of the United States, with 74% of e-commerce spending being through mobile means.
BetaShares' ASIA ETF is a new fund that aims to track the performance of the 50 largest technology and online retail companies in Asia (excluding Japan). The high growth in this market and sector makes the ASIA ETF an appealing addition.
Let's have a look at some of the companies that make up ASIA's holdings:
| Stock | ETF allocation |
| Samsung Electronics | 11.2% |
| Taiwan Semiconductor | 10.7% |
| Tencent Holdings | 10.2% |
| Meituan | 10.2% |
| Alibaba | 6.3% |
| JD.com | 5.2% |
| Pinduoduo | 5.1% |
| Netease | 3.6% |
| Infosys | 3.2% |
| Sea Limited | 3.1% |
| Remaining Holdings | 31.2% |
The fund is fairly concentrated in its weighting towards its top 10 holdings, at 68.8% allocation to the 10 spots. This weighting is based on the market capitalisation of each company, hence the giants' reign over the majority of the holdings.
The top 3 holdings in the ETF have been prolific players in the digital revolution over the years and are situated to continue that momentum. Samsung for instance is a massive competitor to Apple in phones and smartwatches, and the competition has undoubtedly propelled innovation between the two over the years. Samsung is also a player in the lithium-ion battery space, which has potential as the adoption of electric vehicles increases.
Speaking of Apple, Taiwan Semiconductor Manufacturing Company (TSMC) manufactures Apple's chips found in iPhones iPads, and Macbooks. Apple dropped Intel on the latest M1 processor, to TSMC's benefit, as the semiconductor manufacturer has industry-leading manufacturing technology.
Tencent Holdings is a Chinese multinational tech conglomerate that holds stakes in over 600 innovative companies worldwide. Tencent's interests include game developers, WeChat (social media platform), Snapchat, and even Australia's own Afterpay.
The ASIA ETF is new to the market, so its track record is short, but let's take a look at its recent performance:
|
| 1 year | 3 years | 5 years | 10 years |
| Return (%) | 62.01% | N/A | N/A | N/A |
Now those returns are striking and attest to the growth potential in the expanding Asian market for technology. However, this enormous gain also speaks to the potential volatility in this ETF as a result of the focused weighting.
With that being said, we think the ASIA ETF offers a simple way of gaining exposure to the fastest growing technology market in the world. Furthermore, ASIA would be a good complement to an existing tech portfolio with no exposure outside of the US and/or Australia.
Foolish takeaway
ETFs are a new phenomenon in investing but have taken the world of finance by storm ever since the first exchange-traded fund debuted in Australia 25 years ago. The diversification, ease of access to foreign markets, and cheap fees give ETF advantages that few other investment vehicles can match. As such, we think ASX investors can benefit from having at least 1 ETF in their portfolio and these 6 ETFs are prime contenders for 2021 and beyond.
Figures correct as of 27 January 2021. Mitchell Lawler contributed to this report and as of 27 January 2021 he owns shares of Facebook, Tesla, Apple, Afterpay, Appen. Sebastian Bowen contributed to this report and as of 22 April 2020 he owns shares of Alphabet (Class A), Facebook, Pepsico, Caterpillar, Pfizer, Kellogg, Coca-Cola, Philip Morris International, Altria, Procter & Gamble, National Australia Bank Ltd, Telstra Corporation Ltd and VanEck Vectors Wide Moat ETF.
