When building a balanced investment portfolio, most investors seek exposure to the four main asset classes – equities, fixed income, property, and cash.
One big barrier to entry for many investors is knowing exactly how and what to invest in. Choosing investments like individual stocks, can be overwhelming and understandably so. There are seemingly endless opportunities and the pressure to ‘make the right choice’ can leave investors idle.
To simplify the decision-making process, it is worth considering exchange-traded-funds (ETFs). As a simple, cost-effective investment vehicle which provides access to a basket of stocks, it can remove pain points around choosing individual investments.
By using a combination of ETFs with exposure to the four main asset classes, this can be a simple and straightforward way to build a strong, diversified portfolio at a low cost.
When building or refining your investment portfolio, an important consideration will be to incorporate both defensive and growth assets. The split between the two will depend on your investment goals and timeframe – generally, younger investors with longer timeframes can afford to have more exposure to growth assets (equities and property), while those heading into retirement would be more reliant on defensive assets (cash and fixed income).
To assist, the below outlines some examples of ETFs that fit into the defensive and growth asset categories.
Cash and fixed income (or bonds) fit into the defensive asset class category. In 2018, both classes were deemed as standout performers, particularly against volatile global sharemarkets.
For those with a brokerage account, cash ETFs offer an attractive alternative to bank deposits and savings accounts with a higher return and without the need for an account at a separate financial institution. Some examples of popular cash ETFs include the iShares Core Cash ETF and Betashares Australian High Interest Cash ETF.
For investors exploring fixed income, there are currently 25 ETFs listed on the ASX that provide exposure to the asset class. Fixed income ETFs track a basket of bonds issued by a variety of domestic and international corporates and have recently experienced strong performance. Some products offered by the major providers include the VanEck Vectors Australian Corporate Bond Plus ETF and the Vanguard Australian Corporate Fixed Interest Index Fund.
Property and equities (or stocks) are asset classes dedicated to capital growth and income and have a moderate-to-high risk profile.
ETFs are most commonly known by investors for offering broad exposure to the stock market, compiling a basket of ‘top’ stocks – whether the top 100, 200, or aligned to a particular investment theme or region.
Domestically, ETFs such as iShares Core S&P/ASX 200 ETF provide access to the largest companies listed on the ASX. These can be a strong addition to a portfolio as they reduce the risk associated with selecting single stocks.
As appetite for global exposures continues to grow, ETFs can provide easy access to a number of geographic and thematic sectors not available on the ASX. For example, you can access regions such as Europe (iShares Europe ETF) and the US (BetaShares NASDAQ 100 ETF) in a simple transaction.
Looking for more ideas?
The ETF universe is vast and rapidly growing. If you’re looking for help to narrow down your options, there are comparison filters available, including the Bell Direct ETF Filter.
Regardless of your final investment choice, reviewing the Product Disclosure Statement is critical. Pay close attention to the fees, composition, and exposure the product provides to ensure alignment with your personal wealth goals.
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You said:- "Cash and fixed income (or bonds) fit into the defensive asset class category. In 2018, both classes were deemed as standout performers,............... particularly against volatile global share markets. " Really? I don't know about the performance of cash and fixed income in 2018, but I do know that my 40-odd US & AU stock SMSF portfolio earned 40% in FY18. What's more it has earned better than 15% pa on average for the past 10 years. Better than 20% for the past 5 years. (including the effects of several significant volatility dips). Can you get those kind of results from fixed-income investing? Share market volatility is an over-rated bogey. It is of no consequence if financial affairs are well organised, retaining a 2-3 year cash margin. Then there is no need to sell stock in a market dip ( in fact, that's the time to buy!) Medium-long-term, businesses keep growing at 8%-15% pa and the stock market follows.