Is the Vanguard Australian Shares Index ETF (ASX: VAS) a good option for long-term investors looking for healthy returns? Let’s take a look.
ETFs 101
If you don’t know what an ETF is, Rask Education’s free beginner ETF course is a great place to kick-start your learning.
An ETF basically lets you invest in a whole bunch of different businesses within a single investment. It’s very handy if you want to get good diversification, but you don’t want to buy 50, or 100 or 1,000 individual businesses yourself. In fact, I’d say buying 1,000 different companies yourself would be a very poor choice because of all the brokerage costs alone.
Unpacking the Vanguard Australian Shares Index ETF
This particular ETF is one of the most popular for Aussie investors. It’s over $7 billion in size, making it one of the biggest ETFs on the ASX.
The idea is that it allows investors to track the S&P/ASX 300 Index, which essentially represents the bulk of the ASX. When people talk about what the ASX has done that day, the ASX 300 is a good barometer for the overall picture.
Just like the Australian economy as a whole, a big part – almost half – of the VAS ETF is made up of financial and materials businesses, with healthcare and real estate businesses being two of the next largest industries in the ETF’s holdings.
What are the actual holdings?
At the end of December, the biggest 10 holdings inside the VAS ETF (in order) were:
- Commonwealth Bank of Australia (ASX: CBA)
- CSL Limited (ASX: CSL)
- BHP Group Ltd (ASX: BHP)
- National Australia Bank Ltd (ASX: NAB)
- Westpac Banking Corp (ASX: WBC)
- Australia and New Zealand Banking Group (ASX: ANZ)
- Wesfarmers Ltd (ASX: WES)
- Woolworths Group Ltd (ASX: WOW)
- Macquarie Group Ltd (ASX: MQG)
- Rio Tinto Limited (ASX: RIO)
Have the returns from VAS been good?
Over the past 10 years, the average return per year from the VAS ETF has been 7.6%. That’s after including the management fees, which is currently 0.10% annually. Over half of the return has come from the income/distributions.
Is an average of 7.6% per year good? It’s… okay. The problem with the ASX is that it’s dominated by large materials and financials businesses, which typically generate low returns and have relatively poor growth prospects for the future. CSL is the only one in the top six holdings I’d be willing to own today.
Plenty of other ETFs on the ASX have historically performed much better. For example, the Betashares Nasdaq 100 ETF (ASX: NDQ), which focuses on US tech shares, has been a much better long term bet – that ETF is one I’d rather invest in today for the long term. Betashares Global Quality Leaders ETF (ASX: QLTY) is another ETF that I like the look of.
But you could also just go for quality, diversified ASX dividend shares that might be able to provide better long-term returns like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW) and Wesfarmers.
