Building a diversified portfolio with ASX ETFs

Diversification has long been one of the most effective ways to manage risk and build resilience in an investment portfolio. By spreading investments across different asset types and regions, you can smooth out the impact of short-term market movements and help your portfolio grow more consistently over time.

Despite events such as the Global Financial Crisis and the COVID-19 downturn, the Australian Securities Exchange (ASX) has risen by more than 160% since 2000, showing how patient, broad-based investing can reward those who stay the course. One of the most accessible ways to achieve diversification today is through ASX-listed Exchange Traded Funds (ETFs).

What are ETFs?

An ETF is a managed investment fund that trades on the stock exchange like a share. Each ETF holds a basket of assets, which could include Australian or global shares, bonds, property trusts or commodities. Investors buy units in the ETF, and those units represent proportional ownership of all the underlying assets.

ETFs make it possible for individual investors to access professional management, broad diversification and transparent pricing. They can be bought and sold through a brokerage account just like shares, and many charge lower fees than traditional managed funds.

Building a well-rounded ETF portfolio

While most ETFs are diversified within their own focus area, combining several ETFs across different sectors and asset classes can further reduce risk and improve stability. Constructing a balanced ETF portfolio generally involves four key steps: selecting core asset classes, deciding on allocations, reinvesting distributions, and rebalancing over time.

1. Choose your core asset classes

The ASX offers ETFs covering nearly every major asset type. Many focus on Australian shares, providing investors with access to dividend income and franking credits. However, the Australian market leans heavily toward banking, resources and insurance companies.

Including international share ETFs adds exposure to sectors that are less represented locally, such as technology, healthcare and consumer brands. Investors looking for steadier performance might also consider ETFs holding bonds, government securities or listed property trusts (REITs), which can provide income and stability when share markets fluctuate.

2. Decide how to allocate your investment

How you divide your portfolio between these ETF types will depend on your risk comfort, investment timeframe and goals. A longer investment horizon allows for a greater focus on growth assets such as shares, while those seeking steadier income may prefer to hold more in bonds or cash-based ETFs.

For example:

• A growth-oriented investor might allocate 70–80% to Australian and international share ETFs, with the rest in bonds or property.
• A more conservative approach might reverse that weighting, holding the majority in fixed interest ETFs and a smaller portion in shares for gradual growth.

Allocations can be adjusted as personal goals or market conditions change.

3. Reinvest to harness compounding

ETFs generally pay income distributions, often quarterly or semi-annually. Reinvesting those distributions instead of withdrawing them helps you benefit from compounding, when earnings begin to generate their own earnings. Over many years, this can make a meaningful difference to overall returns.

Some brokers offer automatic dividend reinvestment plans, while others require investors to manually reinvest. Either way, consistently reinvesting can be a disciplined and effective habit for long-term wealth creation.

4. Rebalance periodically

Over time, some ETFs in your portfolio may grow faster than others, changing the original balance of your holdings. For instance, if global shares perform strongly, they may end up representing a larger proportion of your total portfolio than you intended.

Rebalancing (reviewing and adjusting your allocations) helps realign your portfolio with your goals. Many investors do this once a year by selling or topping up specific ETFs to bring their mix back to target levels. Regular rebalancing helps control risk and prevents the portfolio from drifting too far from its intended design.

Choosing suitable ETFs

The ASX currently lists more than 700 ETFs covering different asset types, industries and regions. Each fund discloses its holdings, fees and performance, which can usually be found on the ASX website or through the fund issuer’s site. The ASX also publishes a monthly report listing all traded ETFs and their recent returns.

With so many options available, comparing features such as index type, fund size, management cost and historical performance can help narrow the field. While past performance is not a guarantee of future returns, understanding how an ETF has behaved through different market cycles can be informative.

A financial adviser can help identify ETFs that suit your investment goals, timeframe and comfort with market risk. Each of these strategies can be valuable, but they can also be complex to implement. Seek personal financial advice if you think they may suit your situation.

The role of patience and discipline

ETFs make it easier than ever to build a diversified portfolio, but the principles of successful investing remain unchanged: patience, discipline and regular review. Diversification won’t eliminate risk entirely, but it can help reduce the impact of market volatility and provide a smoother path toward long-term goals.

Consistent contributions, reinvestment of income and periodic rebalancing all work together to strengthen portfolio resilience. Even modest, regular investments can grow significantly over time when combined with diversification and compounding.

If you would like to discuss how this applies to you, please reach out to our friendly team at Stream Financial.