Types of Investments & Asset Classes - How to Gain Exposure for Your Portfolio
Types of Investments and Different Asset Classes -How to Gain Exposure for Your Portfolio
Understanding different types of investments or ‘asset classes’, and their characteristics is important when you’re deciding how to meet your investment goals in your desired timeframe. Here is an overview of the different types of investments available, and how to get exposure to them. Let’s start by looking at investment from a broad perspective.
How to Choose the Right Type of Investment
To choose the right type of investment, it’s important to:
Understand how the investment works
Understand how it generates a return, and the type of return expected, for example, capital gain vs income
Know the risks involved
Understand the total cost of ownership. What are the fees for buying, holding, and selling the investment?
Consider the timeframe over which you should invest to receive the expected return
Be aware of tax implications of the investments
Consider how the investment will contribute overall to a diversified portfolio
Active vs Passive Investing – Which is the one for me?
Active and passive are two different approaches to investing.
The aim of passive investing typically is to track the performance of a market index, in anticipation that the market will rise, and your portfolio will appreciate over time.
In contrast, active investors typically aim to ‘beat the market’, a strategy which may seek greater returns, but generally involves higher investment risk.
Asset Classes Explained
Investments and asset classes can broadly be divided into ‘growth’ assets and ‘defensive’ assets. Your financial needs and goals change as you move through life. A focus on growth when you’re young, and have many years until retirement, is likely to shift to an emphasis on capital preservation and income via defensive assets later in life.
Defensive assets- Defensive assets are considered more stable investments with steadier returns. They usually carry lower risk levels, and are more likely to generate lower levels of return over the long term. Cash, gold and fixed income are considered defensive assets.
Growth assets- Growth assets offer higher return potential, but are seen as higher risk investments because of their volatility, especially over shorter time periods of one to three years. Shares (equities) and property are considered growth assets.
Types of Asset Classes: Shares or Equities
Once you understand the difference between growth and defensive assets, you can start to examine options for gaining exposure. One particularly effective way is via the use of an exchange traded fund. Lets look below at the types of ETF’s available on the Australian stock market
Australian ETFs- Australian share ETFs give you exposure to companies listed on the Australian sharemarket and typically aim to track the performance of a sharemarket index.
International ETFs - International ETFs enable you to invest in overseas markets and sectors by tracking a particular index. For example, an international ETF could track a country-specific index, a regional index, a global sector index, or a global index. International ETFs can be bought and sold on the ASX in Australian dollars, just like any other share, making it simple for Australian investors to allocate part of their portfolio to international stocks.
Technology ETFs- Technology ETFs enable you to gain exposure to a portfolio of companies within the technology and related sectors, and typically aim to track the performance of an index. Technology ETFs can offer broad tech-related exposure to technology stocks traded in a particular market, such as the Nasdaq-100, or can provide more focused exposure to a particular technology theme, such as cybersecurity or cloud computing.
Ethical ETFs- An ethical ETF is an exchange-traded fund that either excludes particular industries or companies from its investment holdings, or specifically includes companies or industries that meet certain sustainability targets or other ESG criteria.
Industry or Global Sector ETFs - A sector ETF aims to track a benchmark index for a particular sector or industry, for example, financial services, technology, or energy. Sector ETFs offer you a convenient way to access particular areas of the global or local economy.
Thematic ETFs - Thematic ETFs are designed to provide exposure to a range of industries that stand to benefit from structural, long-term megatrends, such as climate change, cybersecurity, robotics and artificial intelligence.
Equity Income ETFs -Equity income ETFs and exchange-traded products provide exposure to dividend-paying shares. An equity income fund pays regular distributions to investors who hold units in the fund. Those distributions effectively are the unitholder’s ‘share’ of the dividends paid by the shares the fund holds.
Cash and fixed income- Fixed-income ETFs enable you to gain exposure to a portfolio of bonds, and aim to track the performance of an index. A cash ETF invests in deposit products and aims to track cash market indices. The ETF holds Australian dollars in bank accounts with several major banks in Australia and pays income distributions.
Currency ETFs- Currency ETFs are for investors interested in gaining exposure to the performance of a particular foreign currency relative to the Australian dollar.
Hybrid ETFs- With features of both equity and debt, hybrid funds may be suited to investors seeking income greater than the income typically generated by traditional bank term deposits, cash or regular bonds.
Alternative Asset Classes
Digital Assets- The most well-known digital assets are cryptocurrencies such as Bitcoin and Ethereum. As well as cryptocurrencies, other infrastructure providers and market participants play an essential role in the crypto-economy. These include:
crypto trading venues, such as cryptocurrency exchanges
crypto mining companies and mining equipment firms
companies that hold Bitcoin or other cryptocurrencies as a Treasury asset
other service providers, such as companies that produce software to manage cryptocurrency transactions and payments.
You can use ETFs to get exposure to a portfolio of companies leading the crypto economy, in a single trade on the ASX.
Commodity ETF- Commodities, such as gold or oil, can offer portfolio diversification benefits given the historically low correlation of commodities to the other major asset classes. By investing in commodity ETFs, you don’t need to directly invest in complex financial instruments such as futures, and there’s also no requirement to take physical delivery of any commodities.
Gold ETF -Gold historically has shown low correlation to other major asset classes, so an allocation to gold can be a good diversifier as part of a broader investment portfolio. You can use ETFs to get exposure to gold by investing in a gold ETF that aims to track the price of physical gold, or an ETF that holds a portfolio of companies that are involved in the mining or production of gold.
If you are interested in learning more, give us a call on 08 7477 8252. Our Adelaide based advice team can help you create a long-term portfolio, to generate both growth and income for your future.