Fortunately, the growth of the exchange-traded fund (ETF) has made diversifying much easier. Individuals now have thousands of these products — which spreads an investor’s capital across a basket of assets — to choose from.

Buying individual shares is still an important part of a winning portfolio, in my opinion. But ETFs are an effective weapon in building wealth and balancing risk, and especially for new investors.

2 top funds

With this in mind, here are two ETFs that new Stocks and Shares ISA or Lifetime ISA investors might want to consider today.

1. Xtrackers MSCI World Value ETF

The Xtrackers MSCI World Value ETF (LSE:XDEV) invests in shares using a value strategy. More specifically, it takes into account well-used metrics including the forward price-to-earnings (P/E) ratio, price-to-book (P/B) value, and enterprise value-to-cash-flow from operations (EV/CFO) ratio.

Investing in value shares can leave for significant capital appreciation. The theory is that they can rocket in price once the market wises up to their cheapness.

This isn’t the only advantage of investing in value stocks. Such a strategy can also provide investors with a margin of error, as their low valuations often limit the risk of price falls if the company encounters trouble.

The fund helps investors to manage risk in other ways too. It invests in large- and mid-cap companies from developed markets only (like the US, Japan and Britain). In total, it has holdings in more than 400 business spanning a multitude of sectors. These include Cisco Systems, IBM, Toyota and Shell.

With around 40% of earnings sourced from the US, it may be more vulnerable to a Stateside downturn than some other ETFs. But it’s still worth a very close look, in my opinion.

2. L&G Quality Equity Dividends ESG Exclusions UK ETF

Dividends are never, ever guaranteed. And especially during economic downturns when earnings can fall and companies’ financial foundations erode.

The snappily-titled L&G Quality Equity Dividends ESG Exclusions UK ETF (LSE:LDUK) is designed to circumvent these dangers and deliver a solid and reliable passive income over time. In its own words, the fund “seeks to invest in companies distributing income consistently and with the potential to sustain their dividend payouts.”

In doing so, it actively steers clear of firms with weak balance sheets and poor income statements. Major names here include Games Workshop, Barclays, Anglo American and Legal & General.

With a dividend yield of 4.5%, it has the potential to provide a larger passive income than the FTSE 100, whose average yield’s back at 3.6%.

On the downside, this fund invests in a relatively modest 38 companies. So it provides less diversification than ETFs that hold hundreds (or even thousands) of different shares. Still, I believe it could be a good potential buy for dividend-seeking ISA investors to research further.

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Not only do the following have FTSE 100-beating dividend yields right now. I expect them to provide a large and growing dividend over time.

Here’s why I’d buy them if I had spare £20,000 ready to invest. Based on current dividend yields, they could make me £1,200 in extra income this year alone if I split my investment 50-50.

A cheap ETF

As its name implies, the L&G Quality Equity Dividends ESG Exclusions UK ETF (LSE:LDUK) focuses on British companies with strong records from an environmental, social and governance (ESG) standpoint.

It invests in a basket of stocks — 38 at the last count — excluding those that have “fundamentally poor balance sheet, income statement and/or ESG characteristics“. While dividends are never guaranteed, the first two can make the fund a dependable source of passive income.

Major holdings here include miners Rio Tinto and Anglo American, financial services providers Lloyds and ICG, and utilities business National Grid. This broad diversification can help it to provide a smooth return over time.

One drawback with this fund is its low liquidity compared to other ETFs. This can make it trickier and more costly for investors to enter and exit positions.

That said, I still think it’s worth a close look right now. Its dividend yield’s currently 4.5%, around a percentage point higher than the broader Footsie average.

A FTSE 100 dip buy

Insurance giant Aviva (LSE:AV.) is a FTSE 100 share I already own in my portfolio. I’m considering upping my stake when I next have cash to invest too, owing to its brilliant value.

You see, Aviva’s share price has fallen sharply from above 500p in the past six weeks. I think this represents an attractive dip-buying opportunity.

As the chart below shows, its dividend yield is double the FTSE 100 average of 3.6%. And it rises steadily over the following two years amid City predictions of dividend hikes.

On top of this, Aviva shares trade on an undemanding forward price-to-earnings (P/E) ratio of 10.5 times. And its price-to-earnings growth (PEG) multiple sits below the value watermark of 1, at just 0.5.

The financial services firm generates huge amounts of cash, which makes it an attractive target for dividend investors. With a strong Solvency II ratio (205% as of June), it looks in good shape to meet the payout forecasts shown above.

I expect Aviva to deliver a large and growing dividend over time as a growing elderly population drives demand for retirement and protection products. Having said that, intense competition in its markets could impact the firm’s ability to capitalise on this. But I like it all the same.

The post A cheap dividend stock and an ETF I’d buy to target a £1,200 passive income appeared first on The Motley Fool UK.

During the three months to June, total assets under management (AUMs) in European ETFs soared past $2trn for the first time. According to Invesco, funds in the region raised $59bn in the second quarter, up a whopping 88% year on year.

ETFs can play an important role in an investor’s portfolio. Indeed, I own several in my own Self-Invested Personal Pension (SIPP). And I think now’s a great time to consider investing in one or two for a healthy passive income.

Attractive investments

These financial instruments carry several big advantages for investors. Firstly, they help investors manage risk by spreading their capital across dozens (or in some cases hundreds) of different asset classes. These can include stocks, bonds, commodities, or even other ETFs.

I can achieve this diversification much more cost effectively than they would by buying lots of separate individual assets. And because ETFs provide exposure to many different asset classes, sectors, and geographic regions, investors can effectively tailor their portfolios according to their objectives and risk tolerance.

On the downside, I may be able to make a greater return by buying individual stocks rather than a basket of assets. However, history shows us that funds still have the potential to deliver huge profits.

Let’s say I put £20,000 in a FTSE 250-tracking ETF back in 1992. Based on an average annual return of 11%, I’d have turned that into £664,940 today.

So which funds would I buy for passive income? Here are two of my favourites.

Euro star

The iShares Euro Dividend UCITS ETF (LSE:IDVY) — which has been going since 2005 — provides exposure to 30 of the highest-yielding companies in the eurozone.

Some of its largest holdings include ABN Amro, ING Groep and Bankinter. In fact, just over half (57%) of the fund’s invested in financial services stocks. As a consequence, it could provide disappointing returns during economic downturns.

Yet the fund’s exceptional value still makes it worth a close look. Its 12-month trailing dividend yield stands at an enormous 6%. It also trades on a price-to-earnings (P/E) ratio of 8.4 times, while its price-to-book (P/B) ratio is 0.9.

A reading below 1 indicates that the fund’s trading at a discount to the value of the assets in its portfolio.

Cool Britannia

It’s a bit of a mouthful. But the L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LSE:LDUK) also looks like it could be a great source of dividend income.

With 100% of its money locked into British equities, the fund holds some of the FTSE 100 and FTSE 250’s biggest names including Lloyds, BAE Systems and Games Workshop. Today, its trailing dividend yield is 4.6%, more than a percentage point higher than the Footsie average.

Its portfolio currently holds 41 different shares, which — like the other fund I describe — provides decent diversification. And its ongoing annual charge of 0.25% is one of the lowest in the business.

The fund might be vulnerable to a UK-specific economic downturn. But, on balance, I think it could still prove a top fund to consider for investors seeking exposure to London stocks.

The post 2 high-dividend ETFs to consider for passive income in August! appeared first on The Motley Fool UK.