There are 200 ASX ETFs and many of them are focused on shares at the large end of the ASX.
Instead of investing in a large Australian shares ETF or bank shares like CBA (ASX: CBA) and NAB (ASX: NAB), I wonder if smaller shares through the likes of the iShares S&P/ASX Small Ordinaries ETF (ASX: ISO) would be a better option?
ETFs V. LICs Explained
The ISO ETF
The iShares ISO ETF moves away from shares of the largest companies on the ASX and instead holds companies numbered 101 to 300 by market capitalisation (a measure of company size).
ISO aims to track the performance of the S&P/ASX Small Ordinaries Accumulation Index. The companies in the ETF range in market cap from $50 million to billions of dollars.
There are many familiar ASX 200 shares inside the ETF like Saracen Mineral Holdings (ASX: SAR), Harvey Norman (ASX: HVN) and CSR (ASX: CSR).
Navigating away from the largest ASX companies removes a lot of the exposure to the financial sector, making ISO’s three largest exposures to the materials, consumer discretionary and real estate sectors.
Over the last five years, the ISO has returned 7.31% year, which is robust. However, one of the most impressive features of this ETF is dividends.
The current 12-month trailing dividend yield is 7.34%, higher than any of the big four banks — even CBA (ASX: CBA) and NAB (ASX: NAB).
ISO Risks & Fee
The ISO ETF would generally be considered riskier than an ASX 200 ETF, as smaller companies tend to be more thinly traded and less closely followed by analysts, which can lead to share prices that don’t accurately represent the fair value of a company.
ISO may also provide a high dividend yield at the expense of capital gains, with the share price down 3.1% over the last 12 months.
Finally, the ISO ETF charges a management fee of 0.55% per year, which is towards the high end for passive ETFs.
My Take On ISO
The dividend yield offered by the Small Ordinaries ISO ETF is compelling and I like the idea of reducing exposure to some of the largest companies on the ASX, including the big banks, which are already covered by other ETFs and superannuation funds.
However, the low capital gains and high management fee, I think, offset these benefits. I would rather invest in our number-one ETF, which is profiled in the free investing report below.
Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.