If Australia had 'Albo Accounts', which ETF should make the cut?

Imagine every Australian child was given a $1,000 investment account at birth. You get to choose the default investment. What would it be?

It's a fascinating thought exercise in long-term investing, and one sparked by an unusual decision from the United States.

As part of its new Trump Accounts program, the U.S. Treasury recently announced that every contribution will automatically be invested in the State Street SPDR Portfolio S&P 500 ETF (NYSE: SPYM).

While the Treasury approved five broad U.S. equity ETFs, SPYM was selected as the default investment thanks to its ultra-low 0.02% annual management fee and broad exposure to America's largest companies.

That got us thinking. Forget the politics for a moment.

If Australia ever introduced its own version - call them "Albo Accounts" - which ETF deserves to be the default investment?

We put that question to three Australian advisers.

First, a look at the 5 ETFs Uncle Sam picked

Before we get to the advisers' choices, it's worth looking at the investment menu put together by the U.S. Treasury.

It contains the five funds below and, in what would likely trigger a cortisol spike for many professional asset allocators, they're effectively five massively overlapping ways to own the U.S. sharemarket:

• SPDR Portfolio S&P 500 ETF (NYSE: SPYM) – Tracks the S&P 500 and is the default investment for Trump Accounts.
• iShares Core S&P 500 ETF (NYSE: IVV) – Tracks the S&P 500.
• Vanguard Total Stock Market ETF (NYSE: VTI) – Tracks the Morningstar US Total Market Index, covering almost the entire U.S. stock market.
• iShares Core S&P Total U.S. Stock Market ETF (NYSE: ITOT) – Tracks the S&P Total Market Index, providing broad exposure to the U.S. sharemarket.
• SPDR Portfolio S&P 1500 ETF (NYSE: SPTM) – Tracks the S&P Composite 1500 Index, combining large-, mid- and small-cap U.S. companies.

Notice anything missing? There's no fixed income. No emerging markets. No gold. Not even friendly neighbour Canada.

In practice, the differences between the funds are modest. All have around 35-40% invested in technology, so in most cases you're buying the Magnificent Seven plus another 493 U.S. large-cap companies. Or, if you prefer, you can own those same stocks with another 1,000-odd mid- and small-cap companies with tiny weightings thrown in for good measure.

Even the fees barely differ. SPYM charges 0.02% annually, compared with 0.03% for the other four.

Should local investors go 'all-in' on Australia?

With Uncle Sam effectively giving the rest of the world the bird, should Australia ever do the same? If we introduced Albo Accounts, rethought our default super investment, or simply wanted to build wealth, would putting 100% into the ASX 200 really make sense?

For Sebastian Ferrando, Senior Adviser at Koda Capital, the answer couldn't be clearer.

"The Americans can afford home-country bias. We absolutely cannot," he says.

The U.S. already accounts for around two-thirds of the global sharemarket, and many of its largest companies generate a significant portion of their earnings overseas. Australia, by comparison, accounts for just 2.2% of global market capitalisation.

"US markets are ~73% of the global index, and the S&P 500 generates 47% of its earnings from outside of the US. So whilst it feels like the S&P 500 is America-only, it’s not really – it’s investing in the most productive and innovative set of corporations on the planet, that just happen to have their home base in the US," Ferrando says.

Andrew Wielandt, Principal at DP Wealth Advisory, agrees that diversification should extend beyond Australia's borders. He includes U.S. equities in client portfolios, but doesn't believe investors should go all-in on America.

"The U.S. is running a US$1.8 trillion deficit despite a record tax take and a 122% debt-to-GDP ratio ... we have significant concerns that, within five years, the US could be paying more to service its debt than it spends on defence," he says.

Thabojan Rasiah, founder of Rasiah Private Wealth Management, says the U.S. Treasury's decision is politically consistent with President Trump's "America First" agenda - but politics doesn't always make for good portfolio construction.

"I think a better strategy would be to have an 'all-world' exposure to provide better diversification and exposure to global growth," Rasiah says.

3 ETFs for Australia's hypothetical Albo Accounts

The advisers have been clear about what they wouldn't do. So if the Australian Treasury asked them to pick the default investment for hypothetical "Albo Accounts", where would every newborn's $1,000 go?

In the spirit of a bit of fun - and to challenge our thinking about long-term investing - we asked each adviser to nominate a single ETF.

#1 - Ferrando: Vanguard MSCI Index International Shares ETF (ASX: VGS)

• What it does: Invests in around 1,300 companies across developed markets, excluding Australia.
• Management fee: 0.18%
• Five-year return: 13.43% p.a.

For Ferrando, VGS offers the best of the world in one trade.

It gives investors heavy exposure to the world's biggest engine of innovation - the U.S. - without putting all their eggs in one basket.

"The total global stock market is hard to beat ... lots of advisers may default to a collection of large cap ASX 200-style companies but, again, limiting yourself to a subset of 2.2% of the world's market is limiting, putting it politely.

In fact, anyone who looks into their portfolio right now and sees only Australian exposure, I'd be asking some serious questions of my adviser!"

#2 - Rasiah: Betashares Diversified All Growth ETF (ASX: DHHF)

• What it does: An all-equity portfolio comprising approximately 63% international equities and 37% Australian equities.
• Management fee: 0.19%
• Five-year return: 10.48% p.a.

Like Ferrando, Rasiah believes younger investors should lean heavily into growth. Unlike Ferrando, however, he prefers doing so through a diversified asset allocation ETF that owns multiple underlying funds.

He particularly likes DHHF's blend of Australian and international shares, including roughly 42% exposure to the U.S., arguing it avoids becoming overly dependent on any single market or handful of mega-cap stocks.

"I prefer more diversified exposures because small caps provide better long-term risk-adjusted returns. They also reduce the overweight holdings in mega-cap companies, which the data shows underperform over the long term."

#3 - Wielandt: VanEck Core+ Diversified Growth Active ETF (ASX: VGRO)

• What it does: A diversified portfolio with approximately 70% growth assets and 30% defensive assets across equities, bonds, infrastructure, gold and alternative strategies.
• Management fee: 0.39%
• Five-year return: N/A

Wielandt takes a different view altogether. Rather than recommending an all-equity portfolio, he argues most investors are better served by a genuine multi-asset strategy.

He likes that VGRO, which is relatively fresh on the ASX, combines global shares with bonds, infrastructure and gold, while also diversifying across investment styles such as value and quality. His concern isn't just what investors own - it's how they'll behave when markets inevitably fall.

He argues many investors overestimate their tolerance for risk, and an all-equity portfolio capable of falling more than 30% can lead to poor decisions at exactly the wrong time.

For investors wanting a longer track record, he also points to Vanguard Diversified Growth Index ETF (ASX: VDGR) and Betashares Ethical Diversified Growth ETF (ASX: DGGF).

Does Australia already have the answer?

The U.S. Treasury's Trump Accounts experiment poses a fascinating question for policymakers and investors. If Australia ever followed suit, should the default investment be all America, all Australia, the whole world - or something else entirely? It makes for a great debate.

But Wielandt believes there may be a better answer... rather than selecting a single ETF, he suggests Australia could leverage one of its greatest investment success stories: the Future Fund.

"Why not get the Future Fund to run the program for Aussie kids? Its portfolio already includes allocations to hedge funds, private equity and other diversifiers that could deliver better risk-adjusted returns in this unusual world," he muses.

It's an intriguing idea. Instead of giving every Australian a passive ETF, perhaps we should be giving them a stake in one of our national financial treasures. Now that's a thought!