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Diversified ETF ETFs, funds & risks

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The Best ETFs Diversified sector includes ETFs and index funds which invest in multiple asset classes, including:

  • Australian shares
  • International shares
  • Fixed interest & bonds
  • Cash (including cash management trusts and ETFs)
  • Commodities, and
  • Currencies

Meaning, a diversified ETF invests in multiple ETFs or funds so the investor doesn't have to invest in, say, 5 ETFs of their own.

Who cares about diversified ETFs?

Diversified ETFs make investing, especially for beginners, quite easy because an investor could allocate, say, $2,000 to the diversified ETF and gain exposure to multiple ETFs within it. In turn, those ETFs (e.g. share ETFs) are also diversified across many different shares. It also makes tax reporting slightly easier (fewer annual tax forms) and rebalancing is taken care of (i.e. the diversified ETF will rebalance according to the schedule in its PDS).

How to analyse a diversified ETF

When we review diversified ETFs we're looking at the following (in addition to our established methodology):

  • Fees - we consider all the fees. Sometimes, diversified ETFs charge a fee on top of the fees inside the ETF
  • Allocations - we look at how much is invested across sectors/asset classes (e.g. shares versus bonds), types of ETFs (rules-based or index) and geography (domestic versus international bonds)
  • Transparency - we look at ETFs inside the diversified ETF to make an assessment of the overall ETF and the provider
  • Rebalancing - how often the portfolio is rebalanced, who does it and when, will change the tax position for end investors and the returns of the diversified ETF.

We think you should consult a licensed, independent and trustworthy financial adviser if you need help understanding diversified ETFs.

Diversified ETF Sector Risks

Diversified ETFs are a relatively new development in the Australian ETF market and they are growing fast.

However, there are a number of risks you should be aware of and monitor before you buy into a diversified ETF, and afterwards:

  • Allocation rebalancing. In our opinion, one of the best features of a diversified ETF is the automatic rebalancing. However, many diversified ETFs fail to adequately disclose how often they ‘reset’ or ‘rebalance’ the ETF to their target allocation. This lack of disclosure creates potential taxation risks and your portfolio could become unbalanced (i.e. not what you thought you were invested in) over time.
  • Issuer risk. So far, only BetaShares and Vanguard have offered diversified ETFs to the market. Many are still not profitable for the issuers. Of those diversified ETFs which are large and established (e.g. Vanguard’s diversified ETFs), the investments inside the ETF predominantly come from just one ETF issuer. In our opinion, this lack of diversification could expose investors to the risks of having a majority, or in some case all, of the ‘core’ of their portfolio invested by just one investment firm.
  • Sub-scale. Many of the currently available diversified ETFs are not yet profitable because they are small (in terms of FUM) and have low fees. This can increase the probability that an ETF issuer is forced to close the ETF. For the currently available ETFs, we consider this risk to be a low risk.
  • Performance. It can difficult to track the performance and returns of a diversified or multi-asset ETF, especially when the target allocation is not regularly adhered to. However, we’re confident diversified ETFs will become more transparent in time.
  • Track record. Most diversified ETFs have not been operating for at least three years. This is our typical minimum standard for providing a rating on an ETF.

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This brilliant (and free!) report is issued by Best ETFs Australia, a division of The Rask Group Pty Ltd. It is not a recommendation.
Speak to a financial professional before relying on this information and please read our Financial Services Guide (FSG).

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