Money: build an investment portfolio

If you’re aiming to build a varied investment portfolio, without shelling out big bucks, ETFs are a good choice, says Money magazine founding editor Pam Walkley.

Would you like to build a diversified investment portfolio without having to outlay a fortune or do vast amounts of research? If the answer is yes, look to Exchange Traded Funds (ETFs).

These enable you to invest in shares and/or other assets with as little as $500, the minimum parcel size on the ASX. And with many holding 20 to 50 stocks, that is a lot of bang for your buck! You can find a full list of ETFs on the ASX website (asx.com.au) under “products”.

ETFs are a relatively new investment vehicle, launched in Australia about 14 years ago. They have grown fast and now there are 128, up 16.4 per cent in the year to March 31, 2016.

They offer great variety and investors can build a diversified portfolio using only them. Most, though not all, track an index. For example, Vanguard Australian Property Securities fund, winner of the best specialty ETF in Money magazine’s 2016 Best of the Best awards, tracks the S&P/ASX 300 A-REIT index. For the five years to March 31, it returned an average 14.94 per cent a year, compared with the benchmark of 15.83 per cent.

Unlike unlisted managed funds, ETFs give investors the benefits of being listed on the ASX, including transparency, liquidity and disclosure.

ETF investors also generally pay lower fees, mainly because they are managed passively and do not need to employ teams of analysts who aim to beat the market. Indeed, you can pay

as little as 0.15 per cent to track an ASX index, compared with 1-2 per cent for actively managed funds, or around 0.25 per cent to track an international index, with actively managed funds costing at least 2 per cent.

There is evidence many active managers don’t beat their benchmarks; in Australia, about 78 per cent underperformed in the five years to December 2014, according to financial services company Standard & Poor’s.

If you hold an ETF in a sector that hasn’t gone well in recent years, such as Australian shares, your returns may be negative. Another example from Money’s Best ETF Provider of 2016, Vanguard, is its Australian Shares Index ETF, which returned minus 9.95 per cent in the year to March 31. Over five years, it returned 4.72 per cent a year.

So far this year, gold has been the stand-out investment, with the relatively new Market Vector Gold Miners ETF returning 37.91 per cent for the three months to March 31. Six-month returns are 33.94 per cent, according to a Market Vector Gold report. This is the world’s largest gold equities ETF, with more than $8 billion in assets.

After you have chosen which ETFs to buy (see box, left), you buy and sell them through stockbrokers, including online brokers.

You make money from ETFs in the form of dividends and capital growth. The split-up depends on the underlying assets. For example, Vanguard’s property fund five-year returns comprised 5.38 per cent a year in distributions and 9.56 per cent in capital growth. By contrast, its Australian shares fund paid 4.03 per cent a year in distributions, but capital growth averaged plus 0.69 per cent.