Exchange-traded funds (ETFs) are a really good way for investors to get strong diversification through a single investment.
Some ETFs only give exposure to a few dozen shares, whilst others give exposure to a few hundred or even thousands of shares.
However, more investments in a portfolio can lead to slightly smaller returns. So, the below two investments are potential ideas for good returns and very strong levels of diversification:
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iShares S&P 500 ETF (ASX: IVV)
A S&P 500 fund is one of Warren Buffett's favourite ideas to talk about for investors because of its low fees, good returns and solid diversification.
This investment gives investors exposure to 500 businesses that are listed in the US. These are among the biggest, best and most profitable companies listed there.
You do get exposure to the biggest names, with its top holdings being some of the biggest companies in the world such as: Apple, Microsoft, Amazon, Facebook, Alphabet, Berkshire Hathaway, JPMorgan Chase, Tesla and Johnson & Johnson.
One of the main advantages with S&P 500 shares is that they are usually global companies in their sector. That means that it's not just a US ETF, but it's a globally-focused ETF. These businesses have huge addressable markets and have created very impressive profit margins because of how large they have become, benefiting from economies of scale.
Another of the main benefits of this ETF is how low the management fee is at just 0.04%. That means almost all of the return is left in the hands of the investors. Over the last decade this investment has created an average return per annum of just over 18% with a very diversified portfolio.
Vanguard Msci Index International Shares ETF (ASX: VGS)
Whilst the first ETF gives exposure to US-listed shares, this ETF is about most of the global share market. It's invested in every major share market including the US, the UK, France, Germany, the Netherlands, Japan and Canada.
In total, it's actually invested in more than 1,500 businesses. Whilst it's invested in the same global US names as the S&P 500, it is also invested in other major businesses like LVMH, ASML, SAP, Nestle, Unilever and GlaxoSmithKline.
The Vanguard Msci Index International Shares ETF has an annual management fee of 0.18% per annum. That's a bit more than the first ETF, but still cheaper than most other active fund managers.
The returns have been in the double digits over the longer-term. Over the last three and five years, the average return per annum has been 13.26% and 13.76% respectively.
However, whilst this ETF is more globally diversified than the S&P 500, it still has more than two thirds of the portfolio invested in US-listed businesses.
