Investing in exchange-traded funds (ETFs) can be a good way to create good returns through easy investing.
ETFs are attractive because they allow you to invest in a large number of shares through a single investment. Some ETFs are invested in a few dozen shares and others own thousands of shares. It just depends which one you go for.
But diversification is only helpful to a certain level. I think the best type of diversification is when you decrease your risks without decreasing your returns.
Imagine that a lot of your portfolio is invested in Afterpay Ltd (ASX: APT), Splitit Ltd (ASX: SPT), Sezzle Inc (ASX: SZL) and Zip Co Ltd (ASX: Z1P). Your portfolio would have created great returns recently, but it's largely exposed to the same risks. If you also had shares like Xero Limited (ASX: XRO), CSL Limited (ASX: CSL), City Chic Collective Ltd (ASX: CCX) and others in your portfolio then your 'industry risk' is lowered but the returns would still be strong.
That's why I think certain ETFs can provide you with good diversification and good returns. They can add to your portfolio's strength.
Here are two of those ideas:
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BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
Ethical investing may sound like it's expensive, or perhaps you're worried about missing out on better returns if you included 'unethical' shares in your portfolio.
But this option is actually a really good pick in my opinion. Its annual operating costs are just 0.59% per annum. That's a lot cheaper than most Australian fund managers. The ETF screens out a number of categories which are deemed unethical.
And the returns? Well they're strong too. Since inception in January 2017 to May 2020 it has generated net returns of 21.2% per annum. Over the 12 months to 31 May 2020 it generated net returns of 33%. Don't forget those time periods include the COVID-19 selloff.
I think it shows that ethical businesses may actually perform better than just the 'average' business.
What shares does this ETF own which are ethical and perform so well? Its largest 10 exposures at 31 May 2020 were: Apple, Mastercard, Visa, Home Depot, NVIDIA, Adobe, PayPal, Toyota, Netflix and ASML. In total it owns around 200 shares.
I think that looks like a high quality group to me.
Betashares Global Cybersecurity ETF (ASX: HACK)
This ETF is made up of many of the world's leading cybersecurity businesses.
You may have seen the news that Australia was recently subject to a widespread cyber attack. That's just the latest example of businesses and governments around the world that have faced cyber problems.
More and more government services with integral data are being offered online. Citizen information needs protecting. Lots of businesses are now moving their computer infrastructure online. Valuable intellectual property needs protecting. Customer data needs to be kept out of the hands of hackers.
Betashares Global Cybersecurity ETF's top holdings include: Crowdstrike, Broadcom, Splunk, Okta, Cisco, Cloudflare, Zscaler, VMware, BAE Systems and Booz Allen Hamilton. I
Around half of the ETF's sector allocation is to systems software. Other sectors include communications equipment and internet services and infrastructure.
The returns of this ETF are also very strong. Since inception in August 2016, the fund has returned around 20% per annum after fees. Over the past year it has made a 27.8% return.
If you were with an investment manager you'd probably expect to be paying high fees for these types of returns. The annual management fee cost is just 0.67% per annum. I don't think that's super cheap compared to some of the other international ETFs, but it's cheaper than most fund managers in Australia.
Foolish takeaway
I really like both of these ETFs. They're both different to what you'd normally see from an ASX ETF and a typical global cheap global ETF, yet the returns are just as good, if not better.
