Looking to build a share portfolio with ETFs, but confused with all the options?
Let’s have a look at the what you can pick and find a few ways to easily identify what might suit you best.
It’s an old-fashioned showdown. In this article I’m going to put ETF against ETF against ETF.
If you’re new or still learning about what ETFs are and can do, then this showdown should explain some key differences so that you can feel wiser in your decision making.
Buy the end you should be able to pick out what ETFs you want in your investment portfolio and feel confident of how they will contribute to making you money.
Let’s build an ETF investment portfolio
A great way to build a low maintenance but well performing investment portfolio is through the use of ETFs.
Exchange traded funds are a type of investment fund. These might included a number of individual companies – dozens, hundreds, or thousands – within them. Which companies go into an ETF is managed by the ETF provider. There’s usually a theme to each ETF, such as global shares, Aussie shares, tech stocks or healthcare.
You may be familiar with some of the more popular ETF providers in Australia today. Names such as Vanguard, iShares and Betshares are all companies that build and manage ETFs for you to buy on the ASX.
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How do we build an investment portfolio of ETFs?
Even though it’s great to have so many options available, it’s now becoming a bit overwhelming with all the possibilities.
It’s a bit like picking what brand of car. They all have similar features, but sometimes you’ll find there is one that just feels more right.
What I’ll be doing is listing out several ETF themes, and then explaining the most popular products for that category.
To make it a bit easier to understand I’ll highlight what I think are the key differentiators in those categories.
The idea is that we put together a simple, well rounded portfolio containing the following ETFS:
- Aussie stocks
- Global or Overseas stocks
- Emerging or region specific stocks
- Other optional ETFs
I won’t get into the amount of each ETF you should be owning as that is a decision for you to make. What I’ll try and help you do is find a way to pick from the many options available for each of these ETF types.
Note that I won’t be included every single ETF available, but what I think are all valuable options for a portfolio.
Also note that this post is in no way financial advice, but for education and entertainment purposes.
Which Aussie ETF do I pick?
FAIR vs A200 vs STW
In this matchup we are looking for an ETF that covers the Australian stock market.
The general standard for looking at the ASX is the ASX200. That’s the top 200 companies on the ASX by market cap (size).
The three ETFs I’m including are:
- FAIR – BetaShares Australian Sustainability Leaders ETF
- A200 – BetaShares Australia 200 ETF
- STW – SPDR S&P/ASX 200 Fund
Here we have two near-identical ETFs that aim to include the top 200 companies on the ASX with a left-field option being the FAIR ETF which includes only 81 companies that are deemed sustainable and ethical (according to BetaShares).
Wait, where is VAS?
I know many bloggers and investors have a lover affair for VAS, but I don’t. As you’ll soon realise, I love more concentrated funds. This means those with a higher number of companies miss out of my selections. VAS contains the top 300 companies as opposed to A200 and STW.
What the key differences?
I’m not going to note everything about each ETF but just highlighting a few differences in the ETFS as a group.
- Cost – A200 cheapest at 0.07% a years, STW 0.13%, FAIR 0.39%
- Performance – FAIR has poorer track record (but only 3 years old)
- Risk – FAIR marginally lowest in risk (measured by the volatility of standard deviation)
- Holdings- STW and A200 have 200, FAIR has around 80
- Inception – STW 20 years old, others 3-4 years old
- Size – STW in the billion at $4.7 billion, with others around $1billion each
- Top sectors – STW and A200 fin services then materials, FAIR healthcare then fin services
Summary of all three
- FAIR – newest on the block, includes NZ and US stocks lowest standard deviation (15)
- A200 – Cheapest, but little track record compared to STW and not as comparable in size to STW
- STW – cheapest (1/3 of price of others), highest fund size, highest holdings, solid track record
While A200 is the cheapest on the block, STW has been around longer and has better liquidity right now (meaning its easier to buy and sell). FAIR is an option I like as it’s a selection of the more sustainably focussed companies in the ASX200.
Which global ETF do I pick?
Now we move onto the Global ETFs, which are focussed on included companies across the world.
IOO vs IVV vs ETHI
Here we are not comparing apples with apples. We have IOO which is simply the top 100 companies in the world based on size. IVV which is focused entirely in the US markets and ETHI which is another sustainable option.
- IOO – iShares Global 100 ETF
- IVV – iShares S&P 500 ETF
- ETHI – BetaShares Global Sustainability Leaders ETF
What about VGS?
VGS has nearly 1500 companies within it. Compare that to the IOO with only 100. I’m happy owning 100 of the biggest companies in the world, and prefer quality over quantity.
How do they compare?
- Cost – IVV easily the cheapest at 0.04% compared to IOO at .39% and ETHI at 0.59%. As you can tell the more basic the parameters are for including the companies, the cheaper it is
- Performance – all have made over 10% a year recently, with ETHI being new so only have a track record for 3 years but being the strongest in that time
- Risk – is all very similar with a 11-12 standard deviation number
- Holdings – Both ETHI (200) and IOO (100) have a smaller assortment of companies compared to the S&P 500 (as the name implies)
- Inception – ETHI is newest while IOO 14 years and IVV 21
- Size – all in the billions, with the newer ETHI the smallest (but growing fast!)
- Top sectors – ETHI has 26% fin services mostly then 26% tech, IOO and IVV are similar – 22/28% tech then 12/13% healthcare. IVV is all US stocks with others 70% US
Summary of the three
- IVV – cheaper, more holdings, longest tenure, all US stocks
- ETHI – Newest, highest short-term performance, heavy in financial services, higher dividends
- IOO – smallest number of holdings, lowest risk (marginal)
What you pick here might depend on whether you want the cheapest (IVV), strong, long term performance (IOO) or a good recent performance from a more sustainable focussed product (ETHI).
Which regional ETF could I include?
Now we have the first two, which generally would make up the majority of our ETF portfolio, we can now look at complimenting them with some targeted options.
VGE vs IEU vs IAA
If you lookup model portfolios of diversified funds, you might see that there are allocation towards areas that are specific to emerging markets or specific regions.
Emerging markets are also considered developing nations like China, India, Brazil while region specific ETFs might cover places like Europe or Asia (or even countries alone like Japan or Korea).
Why get more specific or focussed with ETF?
To compliment the broader, more popular stocks that have performed already it can be helpful to add some options that target the potentially next big thing. Think Chinese companies like Tencent or Alibaba before they were famous.
There are way more options here in what you can add, but I will compare what I know are popular options already:
- VGE – Vanguard FTSE Emerging Markets Shares ETF
- IEU – iShares Europe ETF
- IAA – iShares Asia 50 ETF
What makes them different to each other?
- Cost – These ETFs are generally higher than broader ETFs (due to the nature of companies being less obvious to include) with fees being around .5% a year
- Performance – IAA (Chinese focussed) has been strongest last 5 years on average
- Risk – VGE is the safest with standard deviation only at 11.5 compared to over 13 for the other two (VGE covers more countries that the others)
- Holdings – VGE and IEU have hundreds with IAA targeting only 50
- Inception – VGE launched as an ETF in 2013 with the others in 2007
- Size – All $500-800m in size
- Top sectors – VGE and IEU are similar in a good spread off all industries with no obvious outlier, while IAA is all Consumer Cyclical (economy dependant), Fin services and Communications
What are the highlights of each option?
- VGE – Many holdings, 40% China then all over the world, youngest ETF but track record and lowest risk ranking
- IEU – Well balanced sectors, mostly EU countries like UK, France, Switzerland, is the most expensive and flatter returns (with Europe struggling lately)
- IAA – Smaller holdings, long term track record – 85% in China, Taiwan and South Korea (but no Japan), biggest size and best track record
These three are all focused on regions of the world where companies are looking to grow. The yields for these ETFs are low and you have likely not heard of many companies included in them, which is why portfolios only allocate 5-10% towards this type of investment.
Which defensive ETF? Do I need one?
A defensive ETF is one that you’d use to help avoid stock market volatility. These are less likely to have you losing money in the short term.
I talk more about how these can be added to your portfolio in my course on investing.
Defensive ETFs are focused on holding fixed-income assets like bonds and cash. Bonds are like IOUs where you loan a company or government your money and they will give you it back plus interest at a later stage.
- AAA Betashares Australian High Interest Cash ETF
- RCB Russell Inv Australian Select Corporate Bond ETF
- IAF iShares Core Composite Bond ETF
How do these defensive ETFs differ?
- Cost – all cheaper than stock based ETFs, under .3% a year
- Performance – They return under 4% per year for RCB and IAF with cash under 2%
- Holdings – AAA is literally cash in the bank, RCB has 13 types of bonds, IAF 543
- Inception – these were all launched in 2012
- Size – RCB the smallest (200millions), other in billions
- Holdings – AAA is cash in the bank, RCB holds corporate bonds (like the big banks), IAF contains mainly government bonds from Australia.
- Yield – RCB is over 4%, with gov bonds under 2%, AAA under 1%
AAA – little to no volatility or returns, safest, cheapest, like keeping money under your mattress
RCB – Best yield and performance, smallest fund, most expensive, all Aus bonds
IAF – Government bonds, cheapest, highest SD (3), Mostly Aus bonds
Here your decision is how to contrast your picks in the stock focussed ETFs with things less likely to drop in value. AAA is cash so likely won’t move but you could lose out as you might be getting more in bank interest. RCB and IAF differ in that one takes bonds from the government while the other takes money from corporations.
What other ETFs can I consider?
So far, we’ve covered the Australian market ETFs, Overseas ETFs, some select regions as well as defensive options.
Out of those four you can build a decent and robust portfolio.
But that’s not all that is out there. There are hundreds of ETFs now available. I’ve talked about the most mainstream ones so far, but there are a couple that you might want to look at in addition or alternatives to anything above.
These are your all-in-one solutions. These are ETFs that contain ETFs or funds within them.
So instead of going through the above and picking which Aussie or Overseas ETF to include, you can just pick one thing.
On the plus side it’s all done for you the downside is you get little to no ability to configure what is in your investment. You have to like what is offered.
Some options for diversified ETFs are
- Vanguard Diversified Investments (like your VDHG, VDGR)
- Betashares Diversified ETFS (like DHHF or DGGF)
As you can see these ETFs have a number of funds within them that give you diversification within diversification.
If you find yourself attracted to a certain sector, industry, or line of thinking there is probably an ETF for you.
These are unlikely to be diverse enough for you to go all-in on with your portfolio, but you can add some of these to compliment your mainstream ETFs.
Popular ETFs in this category are:
- NDQ- BetaShares NASDAQ 100 ETF
- IXJ – iShares Global Healthcare ETF
- VAP – Vanguard Australian Property Securities Index ETF
- ERTH – Betashares Climate Change Innovation ETF
How do I put together an ETF portfolio?
You can buy ETFs easily through an online broker.
- To buy ETFs on the ASX then consider SelfWelath
- To buy ETFs overseas via the US markets then look at using Stake
Another option is to use something like RAIZ. Here you can pick the prebuilt diversified options you build or start what they call a custom portfolio.
This is where you select a few ETFs from their list and confirm that as your portfolio of choice. This is what I personally do.
Most of the ETFs I’ve talked about here are available to be added to a custom portfolio so if you wanted a simpler way to start with shares and ETFs, then Raiz might be for you.
Want step-by-step help on how to build an ETF portfolio?
Join my online course, where I’ll show you exactly how and where to go to build your own investment portfolio. There’s video and tutorials to show you each step of the way.
Moving forward with ETFs
So there’s your intro to a few ETFS available in Australia right now.
I won’t give away exactly what to do with them or which ones to pick, but it helps if you start and learn as you go. You’ll work out what suits you best.