Exchange-traded funds (ETFs) can be very effective to passively grow wealth over the long term. It can be hard to know which investments to go for, so buying a whole bunch of shares or other assets at once could make things easier.
But then there's still the tricky decision of choosing which ETFs to go for.
There are some index funds that focus on a particular market such as the S&P/ASX 300 Index (ASX: XJO). This is tracked by the Vanguard Australian Shares Index ETF (ASX: VAS). But there are others that may be focused on particular attributes or offer wide diversification across different asset classes.
I think the two ETFs below offer investors a good combination of both diversification and growth potential.
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Vanguard Diversified High Growth Index ETF (ASX: VDHG)
This ETF is probably one of the most diverse options on the ASX.
It offers "low-cost access to a range of sector funds, offering broad diversification across multiple asset classes". It invests mainly in "growth assets" and is designed for investors with "a high tolerance for risk who are seeking long-term capital growth".
It targets a 10% allocation to bonds and 90% to shares.
Bonds are essentially debt that governments and businesses use to fund their operations and projects. It's essentially how many governments, such as Australia and the US, manage to keep operating and paying for things despite running budget deficits.
The bond funds that the VDHG ETF invests in are global bonds and Australian bonds.
In terms of the shares, just over a third of the VDHG ETF is invested in ASX shares, 5% is invested in 'emerging market' shares (think: India, Brazil etc.), 6.4% is invested in small international company shares, and the rest (around 42%) in larger international shares from 'western' markets.
As you can guess, the Vanguard Diversified High Growth Index ETF gives underlying exposure to many hundreds of businesses.
VanEck MSCI International Quality ETF (ASX: QUAL)
This investment is much more focused on shares. It owns shares in around 300 businesses that are listed around the world.
While around 75% of the allocation is to US shares, the following countries have weightings of more than 0.5%: Switzerland, the UK, Japan, the Netherlands, Denmark, Ireland, Canada, France, Sweden, and China.
However, aside from offering diversification, a key focus of this ETF is to invest in companies that score well based on three fundamental factors: high return on equity, stable year-on-year earnings growth, and low financial leverage.
In other words, the VanEck MSCI International Quality ETF is invested in businesses that earn good profit compared to how much shareholder money is in the business. They typically generate consistent profit growth, and they don't have much debt.
While there are 300 holdings, the top ten positions make up 31.5% of the total allocation. Those high-quality names are: Microsoft, Apple, Johnson & Johnson, UnitedHealth, Nvidia, Meta Platforms, Alphabet (A and C class shares), Visa, and Nestle.
Despite the heavy decline in 2022, the QUAL ETF has delivered an average return per annum of 13.1% over the last five years, outperforming the MSCI World excluding Australia Index return of 10.1% per annum.
