New research supports a different approach for diversified ETFs

There are four key reasons we think these new ETFs are different from other diversified ETFs on ASX:

1. Asset class breadth.
2. Investing beyond standard market benchmarks by allocating to smart beta and active strategies.
3. Institutional grade Strategic Asset Allocation (SAA) that is assessed and updated quarterly.
4. Granular/targeted in our exposures, such as within fixed income, where we target fixed rate and floating rate and government bonds in individual weights determined by our SAA and do not just use a single sleeve like the composite bond index.

This may lead investors to wonder: what is in the other ‘balanced’ or ‘growth’ ETFs on the ASX?

The answer is a mixture of market-capitalisation-weighted index ETFs of Australian and international shares, plus some bonds. It's the default. It's cheap and has been the familiar recipe for thirty years of compulsory superannuation. But like the Walkman we used to listen to when Superannuation was born, these are old technologies.

Before the launch of our new Diversified Core+ Active ETFs, we released a paper, Smarter by design, which provided evidence supporting the approach we had taken.

You can read the paper - here. Or if you prefer, we’ve summarised the paper below.

The classic 60/40 portfolio was first proposed before man walked on the moon

The paper begins by introducing the classic balanced portfolio, 60% growth, 40% defensive, and its origins tied to the advent of Modern Portfolio Theory (MPT) with Markowitz's 1952 paper, Portfolio Selection.  

The paper then describes how Australia's Superannuation Guarantee institutionalised the idea, and Your Future, Your Super (YFYS) legislation reinforced it. YFYS forced investors not to deviate from the market; it was too big a risk, so many super funds track the benchmark. This became the model for the first diversified growth and balanced ETFs to list on ASX.

While diversification across asset classes is sound, the paper suggests there is a problem with how most diversified portfolios take that exposure. Tracking market-capitalisation indices like the S&P/ASX 200 Index creates a potential problem that most investors would likely avoid.

The hidden problem: Potentially buying high and selling low

Indices like the S&P/ASX 200 are called market capitalisation indices, and they weight companies based on their size, i.e. their market capitalisation. The largest companies, therefore, make up a bigger part of the index. A fund tracking such an index has a structural quirk: when a stock gets more expensive, it takes up more of the index, so the fund tracking it buys more of the now-expensive stock. When a stock gets cheaper, the fund holds less of the now-cheaper one.

In Australia, this shows up as concentration. The top ten names in the S&P/ASX 200, dominated by banks and miners, make up close to half the index. Globally, it's a similar story in a different costume: a handful of US mega-cap technology companies have come to dominate "diversified" world equity benchmarks. An investor who thought they owned international companies has, in practice, been running a concentrated bet on roughly seven stocks.

There are other ways to invest while keeping costs low

Decades of academic work, Fama and French on value and size, Jegadeesh and Titman on momentum, Novy-Marx on quality, established that much of what looked like active manager outperformance was identifiable and persistent ‘factors’, and these could be replicated by what became known as ‘smart beta’ indices.

ETFs track these indices at a comparable low cost to passive market-capitalisation exposures, becoming a middle path: systematic, evidence-based, low-cost, but carefully constructed, rather than by an accident of price.

Where active still earns its keep

Not every market is efficient. In large-cap developed equities, SPIVA data consistently show that most active managers fail to beat their benchmark after fees over five years. In other markets, global listed infrastructure, for example, the active return range is so narrow that passive market benchmark exposure potentially makes more sense.

Other markets, the paper suggests, are ripe for professional active management, emerging market fixed income being one of those. Information isn’t as freely available as in developed markets, liquidity can be thin, currency and political risk are different, and a passive bond index by construction allocates more to the most indebted issuers. The biggest borrower is rarely the best creditor. Active management can potentially exploit that.

The right question, therefore, isn't "active or passive?" It's "where does each tool actually work best?"

The evidence

To test this idea, the paper considers six hypothetical portfolios across three risk profiles: Balanced, Growth and High Growth. One each built using market capitalisation using the moneysmart.gov.au reference portfolios and APRA’s YFYS indices, mirroring how most Australian superannuation fund defaults are built. The other three hypothetical portfolios use a mix of passive, active and smart beta.

This returns table appears in the paper:

Table 1: Hypothetical returns by portfolio to 31 March 2026

Source: Morningstar Direct, VanEck. Common inception date 30 June 2020. Source: Morningstar Direct, VanEck. Common inception date 30 June 2020. Hypothetical performance results have inherent limitations. Index returns do not reflect management fees, transaction costs, or other expenses. Results are calculated monthly, assuming immediate reinvestment of all dividends. Past performance is not indicative of future performance. You cannot invest directly in an index. The common start date for analysis is 30 June 2020, the base date of the ICE 0.5-3 Year AAA Large Cap Australian RMBS Index. A breakdown of the holdings of each of the above portfolios is included in the appendix of the paper –

Three things worth pausing on that the paper highlights.

1. The VE Hypothetical portfolios delivered higher returns relative to the moneysmart portfolios over three and five years. The paper goes on to describe how the VE Hypothetical portfolios did it with lower volatility and, therefore with better risk-adjusted returns.

2. The Balanced comparison is the one that surprised most. The VE Hypothetical version holds less in growth assets (60% versus 70%) and still beats the MoneySmart version on absolute return.

3. The smart beta indices for international equity exposure in the VE Hypothetical versions were quality and value. From 2020 through early 2024, value lagged. It was during this period that quality outperformed. From late 2024, as US rates rose, value rebounded, and many quality names cooled. The hypothetical portfolios that owned both throughout the cycle didn't have to time the rotation; the data shows that they outperformed relative to the market with exposure to both. That structural diversification, across factors and not just asset classes, is also what made the volatility number lower rather than higher, according to the paper.

The takeaway

The question isn't whether to own a diversified fund. The question is whether the one you own is built with the best available tools.

VanEck's Core+ Diversified Active ETFs, which were listed last week, are designed to serve as complete investment solutions for investors at different risk tolerances. Each fund is an ETF of ETFs, using VanEck's proprietary smart beta and active strategies as underlying building blocks within a strategic asset allocation framework. Noting that the performance of the VE Hypothetical portfolios in the paper is not indicative of the future performance of the Core+ Diversified Active ETFs.

Key risks

An investment in our Core+ Diversified Active ETFs carries risks. These risks vary depending on the underlying funds and asset classes to which they are exposed. Risks include those associated with: financial markets generally, asset allocation risks, underlying fund risks, investment management risks, ASX trading time differences, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, and fund operations. See the respective PDS and TMD for more details.