US stock market exposure is a must-have for ASX ETF investors who want to diversify from materials and financials and add some growth to their portfolio. Here are my top 5 US shares ETFs for 2021.
The iShares S&P 500 ETF (ASX: IVV) is among the cheapest ways to get exposure to a broad range of US-listed companies. For a 0.04% yearly management fee, the IVV ETF invests in shares of the top 500 companies weighted by market cap, including all the big tech names like Apple Inc. (NASDAQ: AAPL), Facebook Inc. (NASDAQ: FB), and Amazon Inc. (NASDAQ: AMZN).
IVV provides crucial diversification when paired with an Australian shares ETF like the BetaShares Australia 200 ETF (ASX: A200). A200’s largest sectors are financials, materials, and healthcare, with financials and materials making up nearly half the ETF. Compare this to IVV with its largest allocations going to information technology, healthcare, and communication services. These sector allocations lend themselves to high growth, with IVV returning 17.09% per year over the last 10 years.
The Vanguard U.S. Total Market Shares Index ETF (ASX: VTS) is another low-cost, broad-based US shares ETF. Unlike IVV, VTS aims to represent the entire US share market, holding a portfolio of more than 3,500 companies. This approach slightly alters the sector allocations of the ETF, with a lower allocation to technology than IVV but higher allocations to consumer discretionary and healthcare.
VTS is another ETF with a very long and impressive track record, returning 17.08% per year over the last 10 years. VTS is also slightly cheaper than IVV with a management fee of 0.03% per year. The one big disadvantage of VTS is that it is a US-domiciled ETF, meaning an Australian investor would need to complete a US tax return and could be subject to withholding tax.
The BetaShares NASDAQ 100 ETF (ASX: NDQ) provides a more specific exposure to US technology shares, investing in the 100 largest non-financial companies listed on the NASDAQ market. NDQ is a far more focused and concentrated ETF than IVV or VTS, with almost half of the ETF (~47%) invested in technology shares. These allocations have, historically, paid off for NDQ, returning 21.46% per year over the last five years.
While NDQ is heavily tech-focused, it also provides some exposure to sectors such as communication services, consumer discretionary, and healthcare. Some downsides to NDQ are the higher management fee (0.48%) and the relatively high valuations of the companies within the ETF.
I think investors in the NDQ ETF should expect high volatility and be ready to hold for the long term. BetaShares also offers a currency-hedged version of the NDQ ETF which trades under the ticker code ASX: HNDQ for a 0.51% management fee.
The ETFS FANG+ ETF (ASX: FANG) doubles-down on tech and gets even more concentrated than NDQ. In fact, FANG holds an equally-weighted portfolio of just 10 companies. Eight of the companies are US-listed, while Baidu Inc. and Alibaba Group provide exposure to China. FANG tracks the NYSE FANG+ Index which provides exposure to companies representative of high growth technology or advanced technology. This is a very high risk, high reward ETF.
Because of the equal-weight strategy and commitment to holding a small portfolio of momentum-driven growth stocks, there is potential for high turnover within FANG, which could have tax implications. Another downside is that FANG has a very short track record, having only listed in February 2020. Despite the disadvantages, FANG looks like a tempting purchase for 2021 and charges a reasonably low management fee of 0.35% per year.
The ETFS Morningstar Global Technology ETF (ASX: TECH) is slightly different from the other four ETFs on this list. TECH is an equal-weight ETF that invests in a portfolio of 25-50 companies in the areas of hardware, software, and IT services. This means its different to your typical tech ETF because it doesn’t invest in many of the big names like Amazon, which earns its revenue from e-commerce and advertising rather than software or IT.
While TECH is actually a global shares ETF, around 80% of its exposure is to US-listed companies, so I think it still deserves a spot on this list. TECH provides exposure to many exciting IT sub-sectors and trends like cybersecurity, cloud computing, and software development, and its equal-weight approach means it provides some diversification away from the typical big tech shares and US shares ETFs. TECH charges a management fee of 0.45% per year and has returned 27.46% per year over the last three years.
With a top-heavy and concentrated domestic market, it’s important for Australian ASX investors to avoid demonstrating home bias; in other words, you need to look overseas to make sure your portfolio is diversified and geared for growth. These five US shares ETFs are a great place to start and are all looking like decent options for 2021. View the full list of ASX ETFs.
If you’re interested in knowing which ETFs we would invest in, in 2021, take our free ETF investor’s course.