Do you want to invest in ASX blue chips? Vanguard MSCI Australian Large Companies Index ETF (ASX: VLC) could be the answer.
What is Vanguard?
Vanguard is a funds management business that is owned by its own investors. It was founded in 1975 and now has (or had) around AU$9.7 billion. It has 192 funds in the US, and 232 funds in markets outside the US. It’s a world leader in providing low-cost ETFs.
Why ASX blue chips?
People who haven’t invested in ASX shares before may want to go for blue chips which are supposedly more reliable than smaller businesses. Large businesses have built strong market positions which should allow them to earn higher margins and generate big profit.
Due to their size, blue chips don’t need to hold on to most of the annual profit for growth – they’re already mature businesses. That means they can pay out a lot of the profit as an attractive dividend each year, resulting in attractive dividend yields.
What blue chips does Vanguard MSCI Australian Large Companies Index ETF invest in?
It’s invested in 23 ASX blue chips. Its top 10 holdings are: CSL (ASX: CSL), Commonwealth Bank (ASX: CBA), BHP (ASX: BHP), Westpac (ASX: WBC), NAB (ASX: NAB), ANZ (ASX: ANZ), Wesfarmers (ASX: WES), Woolworths (ASX: WOW), Transurban (ASX: TCL) and Telstra (ASX: TLS).
The ETF has a medium market capitalisation of $53.1 billion according to Vanguard.
The trailing dividend yield of the ETF is high at 4.7%, not including the bonus benefit of franking credits.
Featured video: Franking credits explained
Why wouldn’t you want to invest in this ETF?
Vanguard MSCI Australian Large Companies Index ETF is invested in 23 shares, that’s better diversification than just owning one or two banks. But it’s not as much diversification as offered by options like Vanguard Australian Shares Index ETF (ASX: VAS).
There is also the problem of industry diversification as with most ASX-focused ETFs. Vanguard MSCI Australian Large Companies Index ETF has 37.8% of the portfolio allocated to financials and 19.6% is allocated to materials.
Having almost 60% of the portfolio allocated to two industries with not much growth potential isn’t exactly ideal. You may end up missing out on growth shares like Xero (ASX: XRO) and A2 Milk (ASX: A2M).
Taking into account the ETF’s large dividend yield, the 2.5% per annum total ETF returns over the past five years means it has experienced a negative capital return. There are plenty of ETFs I’d prefer, starting with Vanguard Australian Shares Index ETF.