ASX listed Exchange-traded funds (ETFs) may be the simplest way to invest in the share market.
Ultra low fee funds give us the opportunity to access a diverse array of businesses through a single investment on a stock exchange.
Not every ETF is an index fund, so it’s important to understand what you’re investing in and what the fees are.
There are many ETFs out there, so I’m going to name my favourite ETF for 2019 and beyond:
Vanguard FTSE Asia Ex Japan Shares Index ETF (ASX:VAE)
Vanguard is one of the world’s leading providers of low cost ETFs. It’s run for the benefit of its members, so investors in Vanguard benefit as it becomes larger and benefits from economies of scale.
Some of the other Vanguard ETFs are among the most popular in Australia such as Vanguard Australian Share ETF (ASX: VAS) and Vanguard US Total Market Shares Index ETF (ASX: VTS).
Why this ETF is my favourite:
Diversification
The Vanguard FTSE Asia Ex Japan Shares Index ETF was invested in 851 holdings at the end of November 2018. Having your money invested across hundreds of businesses is an excellent diversification strategy.
The spread of those businesses across various industries is also quite attractive. Around a third is allocated to financials, 22% is allocated to technology businesses and almost 10% is allocated to industrial companies.
Biggest holdings are growth orientated
In Australia, the largest businesses in the index like Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) are barely growing revenue or profit at all in recent years. It’s hard to see a catalyst that will change that any time soon either.
The biggest allocations in an index have the biggest effect on the returns an investor gets. That is one of the reasons why the US share market has performed better in recent years, its top holdings like Amazon and Apple have been growing their profits and share prices.
This Vanguard Asian ETF also has leading technology businesses as some of its major holdings including Baidu, Alibaba and Tencent.
You could say the overall index is nicely growth orientated. According to Vanguard, its earnings growth rate is 10.8%. The Vanguard Australian Share ETF only has a growth rate of 5.5%.
Low valuation
Riskier share markets and individual businesses deserve a valuation to reflect that risk. However, this Vanguard Asian ETF has a price/earnings ratio of only 11.3x. I believe this is an attractive valuation considering the above growth rate.
A wise investor once said that the best time to buy shares is when people are fearful. The ongoing trade war between the US and China is a major contributor to Asian markets declining.
Over the long term the growing wealth of the Asian middle class population is likely to boost the earnings of the businesses in this index.
Vanguard also said this index has a return on equity (ROE) ratio of 16%. Charlie Munger, who is Warren Buffett’s key investment partner, said that returns are likely to be similar to the ROE over the long term.
But, this isn’t the only ETF that could be worth investing in for 2019.
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