A dive into diversifieds

By Vanguard

ETFs

Diversified ETFs are an efficient way to gain exposure to a multi-asset portfolio. 

With hundreds of exchange traded funds (ETFs) now listed on the Australian Securities Exchange, selecting just one to invest in might feel daunting.

While most broad-based ETFs deliver diversification within an asset class by providing access to a portfolio of shares or bonds, they vary in what asset class exposures they provide. For example, investing in an Australian shares ETF provides diversification within the broad Australian share market.

Yet, while an Australian ETF does provide a diversified portfolio of Australian shares, it comes with exposure to the market risk of a single asset class. It’s therefore important to diversify across asset classes to mitigate those market risks, particularly during periods of heightened market volatility.

Being exposed to only Australian equities may mean having little cushioning within a portfolio in the form of fixed income (bonds) or international assets should local equity markets fall.

One efficient way to gain exposure to a multi-asset portfolio in just one trade is by investing in a diversified ETF. These funds can be particularly efficient or someone in the early stages of constructing a portfolio or, whether it be due to lack of time or resources, prefer not to invest in several individual asset class ETFs to gain a similar multi-asset exposure.

Vanguard’s six diversified ETFs are carefully constructed by our Investment Strategy Group, who regularly review each fund to consider new asset classes, currency exposures, home bias, regulatory and tax impacts and investor behaviours.

Diversified ETFs can be used as either the core of a combined solution with other investments, or as a whole solution.

What is a diversified ETF and what assets are included?

A diversified ETF provides access to a range of asset classes and sectors in just the one fund, and is designed to provide return outcomes over the long-term that correspond with the level of risk assumed. Depending on one’s investment goals, risk tolerance and time horizon, it’s possible to select either a conservative, balanced, growth or high growth target asset allocation.

Here’s are Vanguard’s diversified ETF product options.

• The Vanguard Diversified Conservative Index ETF (VDCO) has a 70% allocation to income-producing assets (bonds) and 30% to growth assets (shares).
• The Vanguard Diversified Balanced Index ETF (VDBA) has a 50% allocation to growth assets (shares) and 50% to income-producing assets (bonds).
• The Vanguard Diversified Growth Index ETF (VDGR) has a 70% allocation to growth assets (shares) and 30% to income-producing assets (bonds).
• The Vanguard Diversified High Growth Index ETF (VDHG) has a 90% allocation to growth assets (shares) and 10% to income-producing assets (bonds).
• The Vanguard Diversified All Growth Index ETF (VDAL) has a 100% allocation to growth assets (shares).
• The Vanguard Diversified Income ETF (VDIF) targets a 40% allocation to defensive asset classes and a 60% allocation to growth asset classes.

A key feature of diversified ETFs is that they not only offer access to broad asset classes like equities and fixed income, they also provide exposure to different sub-asset classes (such as domestic and international investment-grade bonds with different maturities) and therefore provides investors with another layer of diversification.

Of course, you could attempt to create a similar portfolio using a variety of ETFs to achieve similar results, but the expense ratios and brokerage fees paid across multiple ETFs will add up and subtract from your investment returns.

 

How can diversified ETFs be used in a portfolio?

Diversified ETFs can be used as either the core of a combined solution with other investments, or as a whole solution.

Depending on your investment plan and the level of control you desire over your portfolio, you can let diversified ETFs form the core of your portfolio and then supplement that with investments in other sectors of interest or with actively managed funds, if appropriate.

Whichever strategy chosen, it’s important to focus on the core fundamentals of a balanced asset allocation, rather than be distracted by market movements and individual security performances.

 

What are the advantages of using diversified ETFs?

Aside from instant exposure to multiple asset and sub-asset classes, diversified ETFs are particularly cost effective compared with the fees involved in buying multiple ETFs or individual investments.

They also remove a few common behavioural risks that some investors may face. For example, some may find it challenging to stick to their investment plan when markets get rocky and are consequently tempted to alter their asset allocation.

Diversified ETFs can keep investors from switching in and out of the fund’s specific assets, thus allowing them to maintain a consistent risk profile no matter how the market moves.

Another example is that many investors have a home country bias where they prefer to invest in local over international assets. Diversified ETFs usually offer access to international assets within the portfolio removing some of the prohibitive factors (such as costs, time and effort) associated with investing in overseas investments.

Diversified ETFs are an accessible and transparent option for many investors and can form a valuable part of any portfolio. To learn more about diversified investments, see here.

 

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