Is this the best ASX ETF to diversify your portfolio with?

Here at the Motley Fool, we often encourage investors to diversify their portfolios. Not just using ASX shares, or exchange-traded funds (ETFs), mind you, but buying stocks from other markets as well. The ASX is a wonderful place to invest. But it represents just a tiny fraction of the world’s best businesses.

I have long recommended that Australian investors diversify into US stocks. The US, with its world-class companies like Microsoft, Alphabet, and Mastercard, is fertile ground for finding some of the best companies in the world.

However, chances are most Australians are already quite heavily invested in the American markets thanks to their superannuation funds. Many Australians might also feel a little queasy about investing Stateside right now for various reasons. One might be the high correlation that the ASX and the US stock markets have historically shown.

So, if you are looking for true stock market diversification, you might wish to consider using an ASX ETF that many investors haven’t considered, or may not have even heard of.

The Vanguard FTSE Emerging Markets Shares ETF (ASX: VGE) is a massive investment in scope and scale. It holds more than 4,000 underlying stocks, drawn from about two dozen countries’ stock markets. The economies of these countries, as you might guess from the fund’s name, are classified as emerging. They range from China, India, and Taiwan to Kuwait, Malaysia, and South Africa.

Those are markets that most investors have very little exposure to, if at all. Some of this ETF’s largest holdings are stocks you may have heard of, such as Taiwan Semiconductor Manufacturing Co. or Alibaba. Others, like Saudi National Bank and Petroleo Brasileiro, are more obscure.

An ASX ETF to instantly diversify a stock portfolio

Using an ETF like VGE enables investors to diversify away from both the ASX and the United States as much as one practically can in Australia. For investors who have already done so in recent years, the results have been quite lucrative. As of 31 October, the Vanguard FTSE Emerging Markets Shares ETF has returned 18.57% year to date and 20.96% over the preceding 12 months. Over the past three years, the returns have averaged 17.43% per annum.

Going back further, though, those returns are more tempered. VGE units have averaged 7.71% per annum over the ten years to 31 October, and 7.6% per annum since this ASX ETF’s inception 12 years ago this month. These figures all take into account VGE’s management fee of 0.48% per annum.

ASX investors also have to keep in mind that this ETF is not currency hedged. That means that international currency movements (which can be volatile in emerging markets) have the potential to both positively and negatively influence returns when brought back to Australian dollars.

Even so, this ASX ETF from Vanguard is arguably a great option if you want to meaningfully diversify your ASX investments.

The post Is this the best ASX ETF to diversify your portfolio with? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in Alphabet, Mastercard, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Mastercard, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Alibaba Group and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Mastercard, and Microsoft. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.