Which ETF would be a better buy for the long-term, Vanguard MSCI Index International Shares ETF (ASX: VGS) or Vanguard Australian Shares Index ETF (ASX: VAS)?
I am going to share my thoughts on what each ETF has in terms of an advantage . Global shares versus Australian shares.
Fees
One of the main things that ETF investors like to compare is how much the annual management fee is each year.
The VGS ETF has an annual management fee of 0.18%. That is more than the VAS ETF’s cost of 0.10% per annum.
VAS is cheaper, but there isn’t much in it when you’re talking about such low costs. And costs aren’t the only thing, though it helps a little.
Income
Getting income from shares can be very useful in this period of very low interest rates.
VGS invests in global businesses, which typically have a lower dividend yield. That’s why, according to Vanguard, the yield for VGS is just 1.6% right now.
But the Australian share market, dominated by banks and miners, have lower valuations and higher dividend payout ratios. According to Vanguard, the yield for VAS is 2.7%. I’d guess this yield will increase a bit as bank dividends recover from COVID-19 impacts.
Even before the recovery, VAS has a noticeably higher yield. But there is more to investment returns than income.
Total returns
Capital growth is an important element of the equation, perhaps the most important part .
Total returns are driven by the businesses that are growing within the portfolio. The global VGS portfolio is full of names like Microsoft, Apple, Alphabet and Amazon that continue to grow in size and generally have high profit margins.
But Aussie companies like banks are miners are already at a very mature stage and go through cyclical periods.
Over the last five years, the VGS ETF has produced an average return per annum of 12.9%. That compares to the VAS ETF return of 10.2% per annum over that same time period.
The global portfolio has done better by almost 3% per annum. That makes a significant difference over time.
Which one is better?
If shorter term income is your only concern, then the VAS ETF seems like the better choice. But I’m not expecting a lot of growth.
I believe the VGS ETF wins on most other measures. It is more diversified across sectors. The geographical diversification is very good, better than just being focused on one country (Australia). VGS also has more holdings – around 1,500 compared to 300 in VAS.
The other statistics also show the underlying quality. The VGS has a return on equity (ROE) ratio of 15.9% with an earnings growth rate of 12%. That compares to 11.2% and 4.6% respectively, for VAS.
