August 11, 2022

Why investors are looking to ETFs to diversify portfolios

BlackRock’s Head of Wealth Australia explains why ETFs are the ideal tool to diversify your portfolio and ride out the current market uncertainty.

Being invested in the current volatile market might feel a little like riding a roller coaster – many investors might be desperate to jump off mid ride and run to cash. However, it’s in difficult times like these that committing to your long-term investment plan is more important than ever.

Excellent tools for doing just that are exchange traded funds. ETFs are a useful instrument for putting together a diversified portfolio across a range of investments and asset classes. An ETF provides exposure to a vast range of stocks – 200 in the case of the iShares Core S&P/ASX 200 ETF – in a single trade.

Chantal Giles is Head of Wealth Australasia at BlackRock, and is responsible for distributing the range of ETFs offered by iShares along with BlackRock’s alpha-seeking and index strategies.

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

“And you can do that quite instantly with ETFs because they’re giving you that kind of broad market exposure. And so, you’re getting greater diversification in buying an ETF versus a single stock.”

Another important benefit of ETFs is their transparency – you know exactly what the fund is investing in (unlike some unlisted managed funds). An ETF must mirror the investments in its underlying index of stocks – for example, the ASX/S&P 200 – and the holdings in those indices are usually public knowledge and easy to find. This means there are no surprises or unknown holdings.

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

Dealing with volatility

Given the vast range of ETFs on offer, it’s straightforward to invest in a reasonably diversified portfolio of global equities, Australian equities, fixed income and listed property with ETFs alone.

“Most of our clients are trying to achieve an objective and put together a portfolio, so they’re looking at all the asset classes and how they’re working together,” Giles says.

It can be difficult and time-consuming to seek out investments that do well in times of market volatility and uncertainty. But there are low-volatility indexes, and ETFs that follow them, that investors can utilise.

For example, the iShares Edge MSCI Australia Minimum Volatility ETF follows the MSCI Australia IMI Select Minimum Volatility (AUD) Index. In designing that index, MSCI has already done the hard work by finding Australian equities with lower volatility.

“We’re seeing investors thinking about using such tickers like minimum volatility equity exposures, just to smooth that ride a little bit,” Giles says. “And with an ETF you can do that in a single trade rather than trying to identify the single stocks that might do well in volatile times.”

Investing in a higher-inflation environment

Investors are currently tightly focused on higher inflation and higher interest rates, and what both mean for their portfolios.

For many years, as interest rates remained near record lows, investors seeking income could not get much yield from cash or fixed interest. That is changing as central banks around the world raise interest rates to quell inflation.

In terms of the types of ETFs attracting increased interest as a result, Giles says BlackRock is seeing several investors rethinking fixed income as the higher interest rates mean they will be able to get higher rates of return on their investments.

“Yields are now creeping up and fixed income is looking a little bit 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 this easily. Sustainable or environmental, social and governance (ESG) ETFs invest in indices that measure the performance of sustainable, ethical or climate transition-focused companies. As mentioned earlier, their transparency allows investors to easily see what the ETF is invested in and make their own decisions around whether those stocks match their beliefs.

“ETFs provide a really transparent way of accessing the market,” Giles says. “And so clients can see that the ETFs are aligned to their values and thoughts.

“We’ve now got sustainable investing available to everyone in the market through ETFs, which gives people choice of where they can put their money.”

 In for the long haul

It is hazardous for any investor to try to pick the bottom of the market and invest then. But it’s also hazardous for investors to run for cash every time there is a market blip.

Research around superannuation conducted last year provides a useful warning to investors looking to shift out of growth investments and into defensive.

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

They found a near 50 per cent increase in poor switching decisions as the pandemic progressed. And bad switches, which are defined as having a worse impact on balances over the period relative to not doing anything, grew from 33.5 per cent to around 50 per cent during the pandemic.

So, if investing for the long term, it really can be better to hold on tight and ride out the market volatility, taking relevant precautions where possible. Such measures could involve a hedge around inflation or minimum volatility exposures, according to Giles, who adds that ETFs are a very useful tool to help investors do that. And for those investors looking to put a toe in the investing water, ETFs are a good instrument for that also, delivering a broad exposure of stocks with a small initial outlay.

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

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This information has been provided by WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL No. 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.
Important Information: This article has been prepared with the co-operation of BlackRock Investment Management (Australia) Limited (BIMAL) ABN 13 006 165 975, AFSL 230 523. Comments made by BIMAL employees here represent BIMAL’s views only. This article provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. 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 with respect to the purchase or sale of any financial product in any jurisdiction.
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