Streamlining Portfolio Creation With ETFs
Are you among the increasing number of investors wanting to create a widely-diversified portfolio based largely on low-cost, index-tracking exchange traded funds (ETFs)?
One approach is to invest in a selection of index ETFs in different asset classes to build at least the core of an investor's diversified portfolio – perhaps adding much-smaller "satellites" of other favoured investments.
Another approach, a new one for Australian investors, is to invest in a diversified index ETF as at least the core of an investor's overall investments.
Among the key attributes of a diversified index ETF is that its portfolio is automatically rebalanced between asset classes to remain within an investor's desired long-term strategic asset allocation.
With a diversified index ETF, investors can:
- Obtain a multi-asset portfolio, covering the major asset classes, with a single trade.
- Obtain instant access to a widely-diversified portfolio. (Each of Vanguard's four diversified index ETFs provides exposure to over 10,000 securities.)
- Pay low management fees. (Vanguard diversified ETF funds have a 0.27 per cent annual fee.)
- Choose a pre-set portfolio to suit various investor goals, risk tolerances and investment time horizon. (Investors can choose between conservative, balanced, growth or high-growth portfolios – each with varying exposure to equity and fixed-income securities.)
Critically, diversified index ETFs help streamline traditional portfolio construction, freeing up your time to focus on other things including the rest of your investments, your retirement savings plans, and, of course, your lifestyle.
When constructing investment portfolios – whether or not using index funds, actively-managed funds, direct investments or a combination – investors should consider a range of factors.
These factors include their investment objectives, their investment time horizon, their tolerance to risk, investment costs and the need to take a disciplined approach to investing.
In coming weeks, Smart Investing will examine what to think about when creating a diversified investment portfolio from scratch.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.