Business research

Why investors are turning to ETFs to diversify their portfolios

Investing in today’s volatile market can feel like riding a roller coaster – many investors might be desperate to jump halfway through and run for the money. However, it’s in difficult times like these that commitment to your long-term investment plan is more important than ever.

Great tools for doing just that are exchange traded funds. ETFs are a useful tool for building a diversified portfolio across a range of investments and asset classes. An ETF offers exposure to a wide range of stocks – 200 in the case of the iShares Core S&P/ASX 200 ETF – in a single transaction.

Chantal Giles is Head of Wealth Australasia at BlackRock and is responsible for distributing the range of ETFs offered by iShares as well as BlackRock’s alpha and index research strategies.

She says investors are using ETFs in the current environment to help them diversify their portfolio.

“And you can do that pretty instantly with ETFs because they give you that kind of broad market exposure. And so, you get more diversification by buying an ETF compared to a single stock.

Another big advantage of ETFs is their transparency – you know exactly what the fund is investing in (unlike some unlisted managed funds). An ETF should reflect investments in its underlying equity index – for example, the ASX/S&P 200 – and holdings in these indices are generally public knowledge and easy to find. This means that there are no surprises or unknown holdings.

“As long as you’re looking at good quality ETFs, you know they’re going to perform as expected,” says Giles.

Dealing with volatility

Given the wide range of ETFs on offer, investing in a reasonably diversified portfolio of global equities, Australian equities, fixed income and listed assets is simple with ETFs only.

“Most of our clients are trying to achieve a goal and build a portfolio. So they’re looking at all the asset classes and how they work together,” says Giles.

It can be difficult and time-consuming to research high-performance investments in times of market volatility and uncertainty. But there are low-volatility indices and ETFs that track them that investors can use.

For example, the iShares Edge MSCI Australia Minimum Volatility ETF tracks the MSCI Australia IMI Select Minimum Volatility Index (AUD). When designing this index, MSCI has already worked hard finding Australian stocks with lower volatility.

“We’re seeing investors thinking about using tickers like minimum equity volatility exposures, just to sweeten this run a bit,” says Giles. “And with an ETF, you can do that in one transaction rather than trying to identify individual stocks that might do well in volatile times.”

Investing in a high inflation environment

Investors are currently narrowly focused on higher inflation and higher interest rates, and what the two mean for their portfolios.

For many years, as interest rates hovered near record lows, income-seeking investors couldn’t get much return from cash or fixed interest. This is changing as central banks around the world raise interest rates to curb inflation.

As for the types of ETFs that are attracting increased interest as a result, Giles says BlackRock sees many investors rethinking fixed income securities because higher interest rates mean they will be able to earn higher rates of return. high on their investments.

“Yields are climbing now and fixed income is looking a little more attractive these days,” she says.

An ethical option

For investors looking to invest in line with their values, ETFs are a tool to do so easily. Sustainable or environmental, social and governance (ESG) ETFs invest in indices that measure the performance of companies that are sustainable, ethical or focused on climate transition. As mentioned earlier, their transparency makes it easy for investors to see what the ETF is invested in and to make their own decisions about whether those stocks align with their beliefs.

“ETFs offer a really transparent way to access the market,” says Giles. “So clients can see that ETFs are aligned with their values ​​and ideas.

“We now have sustainable investing available to everyone in the market through ETFs, giving people choice in where they can put their money.”

For the long term

It is dangerous for any investor to try to hit the bottom of the market and then invest. But it’s also dangerous for investors to run for cash whenever there’s a market jolt.

Pension research conducted over the past year provides a useful warning to investors looking to switch from growth to defensive investments.

Griffith University and the Australian division of global software company, Iress, analyzed 42,000 decisions by pension fund members to switch investment options from January 1, 2019 to March 31, 2021.

They found an almost 50% increase in poor switching decisions as the pandemic progressed. And bad switches, which are defined as having a worse impact on balances during the period compared to doing nothing, fell from 33.5% to around 50% during the pandemic.

So if you’re investing for the long term, it may really be best to hang in there and ride out market volatility, taking the necessary precautions where possible. Such measures could involve hedging around inflation or minimum exposures to volatility, according to Giles, who adds that ETFs are a very useful tool to help investors do this. And for investors looking to get started in investing, ETFs are a good vehicle for that too, offering broad equity exposure with a small initial outlay.

“They’re inexpensive – with one exposure, you can access a broad market, like the stock market or the bond market,” says Giles. “And I think that ease of execution, ease of understanding and quality exposure is a great tool for investing.”

This information has been provided by WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities), a market participant under ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL No. 230686 (NAB). Although all reasonable precautions have been taken by WealthHub Securities in reviewing this material, this content does not represent the views or opinions of WealthHub Securities. Any statement of past performance does not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without regard to your objectives, financial situation or needs. Before acting on such advice, we recommend that you determine whether it is appropriate for your situation.

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Important Information: This article was prepared with the cooperation of BlackRock Investment Management (Australia) Limited (BIMAL) ABN 13 006 165 975, AFSL 230 523. Comments made by BIMAL employees here represent the views of BIMAL only. This article provides general information only and does not take into account your individual goals, financial situation, needs or situation. Before making any investment decision, you should obtain financial advice tailored to your needs based on your individual goals, financial situation, needs and situation. Refer to BIMAL’s Financial Services Guide on its website for more information. This material is not a financial product recommendation or an offer or solicitation to buy or sell any financial product in any jurisdiction.