Is Vanguard MSCI Index International Shares ETF (ASX: VGS) or Vanguard Australian Shares Index ETF (ASX: VAS) a better investment option?
What are they?
Each of these exchange-traded funds (ETFs) is run by Vanguard, one of the largest asset managers in the world that tries to offer investors cheap investment options.
The VGS ETF is about investing in the global share market. The VAS ETF is about investing in the ASX 300, which is the 300 biggest businesses on the ASX.
Is VGS or VAS better?
Each ETF comes with its positives and weaknesses.
The VGS ETF has an annual management fee of 0.18%, whereas the VAS ETF has an annual fee of 0.10%. The Australian one is slightly cheaper, but there’s not much in it.
The biggest difference is obviously the holdings.
VAS ETF has large holdings like BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL) and Goodman Group (ASX: GMG).
But the VGS ETF is very different. It has the biggest names in the world in there such as Microsoft, Amazon, Apple, Alphabet, Facebook, Tesla and Berkshire Hathaway.
An ETF can only do as well as its underlying holdings. Those global businesses have produced a lot more capital growth than the VAS ETF, so naturally the long-term returns have been better.
Over the last five years, the VGS ETF has produced an average return per annum of almost 14%. The average VAS return over that same time period has been 10.3%. That adds up to a sizeable different over five years. Past performance won’t necessarily be repeated over the next five years though.
There is one return element that the VAS ETF beats the VGS ETF. Historically, it has paid much higher dividends because the ASX is dominated by banks and resource businesses, which have big payout ratios and lower earnings multiples. Many big global businesses don’t even pay a dividend like Amazon, Facebook, Alphabet and Berkshire Hathaway.
Which one is better?
If you’re just looking at total returns, I think the VGS ETF is more likely to produce stronger returns over time as those business grow profit faster, have stronger margins and re-invest that profit. However, both might be able to produce adequate returns over time.
