Why diversified ETFs beat big tech bets

For years, large-cap growth stocks - especially the Magnificent 7 tech giants - have dominated headlines and portfolios.

Their strong performance has driven impressive returns for equity ETFs with heavy US exposure. Take the S&P 500 Total Return Index, for example. As of mid-September, it had delivered an average annual return of more than 20% (in AUD terms) over the past three years.

But markets don't stand still and past performance is not a reliable indicator of future performance. As cycles shift and the definition of large cap tightens, leaning too heavily on these giants can mean taking on more risk than you might expect.

Portfolios focused solely on large-cap growth are starting to look more alike and less resilient. These stocks can swing sharply when sentiment changes or sector leadership rotates, and investors who concentrate here may miss out on opportunities in other sectors or regions.

That's where diversified ETFs come in. They're designed to address these challenges by spreading risk across asset classes, sectors and geographies, all in a single, professionally managed fund.

Instead of betting on a few big players, diversified ETFs invest in thousands of securities from both local and global markets.

The Vanguard Diversified All Growth Index ETF (VDAL), for example, holds more than 6000 securities.

These funds are also regularly rebalanced, meaning investors don't need to actively monitor markets or make frequent adjustments themselves.

One of the biggest advantages is that diversified ETFs also overcome home country bias, an investor's natural tendency to invest mostly in familiar, local markets.

It can be tempting to stick with what's familiar, but diversified ETFs ensure investors are tapping into opportunities around the world, not just in their backyard.

There are two main ways to use diversified ETFs. First, as a standalone investment - just hold the diversified ETF that best aligns to your risk tolerance and you're done.

Second, as the core of a portfolio - using a core-satellite strategy. One way to approach this is by anchoring your portfolio to a diversified fund for low-cost and broad diversification.

Then, if you wish, adding smaller 'satellite' positions in specific sectors or themes to meet your individual goals.

How to invest $10k

Everyone's situation is different and factors such as time horizon, risk appetite and liquidity needs should always be considered.

One way to think about building a resilient portfolio is to anchor most of it in a diversified ETF, which provides broad exposure, keeps costs low and helps smooth out the ups and downs of day-to-day market activity.

Then if you want to lean into a particular theme or sector outside the core, you might consider adding satellite positions in sector or thematic ETFs.

This approach helps ensure you're not putting all your eggs in one basket - instead you're still positioned to benefit from a wider range of market opportunities.

This kind of core-satellite approach helps to stay diversified while still having room for investors to personalise their portfolio depending on their individual circumstances.

Adam DeSanctis is the head of ETF Capital Markets, Australia

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