VLC: Analyst Warning

We apply a generic risk warning to all ETFs and funds that may not have another, more obvious, risk warning applied to them.

At Best ETFs Australia we apply this warning to all ETFs and funds regardless of their structure, exposure, fees, sector and strategy/type. We want to remind our thousands of readers, clients and members that investing is risky and no ETF or fund is a risk-free investment.

You should always read the Product Disclosure Statement (PDS) and/or speak with a qualified financial adviser before investing in an ETF, product or fund that you do not completely understand. There's a reason we call it "investing" and not "saving" -- that reason is risk.

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Australian shares sector

The Best ETFs Australian shares sector includes ETFs, managed funds and index funds which cover the ASX and national stock exchange (NSX). It also includes other sharemarket-focused ETFs and funds which may hold investments overseas (e.g. via the New Zealand or US exchanges).

Performance Characteristics

Over the ultra-long-term, the Australian share market has proven to be among the best-performing in the world. We truly are 'the lucky country'.

One of the unique features of the Australian sharemarket is a willingness by companies to pay substantial dividends back to shareholders. We believe this may be a result of Franking Credits.

What exactly does Australian shares invest in?

The VLC ETF invests in large-cap Australian shares, which offer growth and income potential. You could buy all of these companies yourself using a share brokerage account, but that would be a very expensive and time-consuming process. ETFs are an effective way to invest in an entire sector through a single trade.

Sector risks

The Australian sharemarket is heavily skewed towards financials (i.e. banks and insurers), resources and property. These companies tend to be 'cyclical', meaning they move in-line with the direction of the broader economy and financial markets.

Some risks to investing in this sector include:

• Market risk: This is the risk that the performance of the ETF/fund rises or falls unexpectedly day-to-day, month-to-month or even year-to-year. We believe these price movements are unpredictable. Therefore, we believe investing for multiple years is the most prudent way to invest.
• Home country bias: That happens when you invest a larger amount of your money in local/Australian investments and exclude overseas markets. This may be because it is 'too difficult' or 'too complex' to invest in overseas markets.
• Concentration: The Australian share market is made up of many companies. However, traditional market indices have a very high proportion of their performance tied to just a few investments, such as blue-chip shares in the financial and resources sectors.
• Regulatory risk: Australia is a market with a robust financial system. Changes to the rules or laws regarding public investments could alter the performance of ETFs and funds in the sector.

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What you need to know about Vanguard

Vanguard Australia is one of Australia's largest ETF providers, both by number of ETFs and total money invested (called 'funds under management'). Part of the global Vanguard Group Inc, Vanguard's history dates back to the mid-1970s.

Globally, Vanguard has nearly $7 trillion invested in its ETFs and unlisted index funds. It also offers rules-based investment strategies -- Vanguard calls them 'active strategies' but we categorise them as rules-based.

Vanguard Group Inc manages $7 trillion of investor money

One of the things that makes Vanguard unique in the finance industry globally is that it is investor-owned ("mutual"). The US-based Vanguard Group Inc is, therefore, funded by the very investors it serves.

We believe this unique ownership structure is one of the key reasons why Vanguard has become the global leader in low-cost ETFs and index funds and will continue to be so.

Potential allocation for VLC

This ETF might be used as part of a 'core' allocation in a diversified long-term portfolio because of its diversified and transparent investment strategy, low costs, risk profile and the expectation of long-term returns.

What is The Core-Satellite Approach?

A core-satellite approach puts investments into two 'buckets' depending on the expected risk and returns.

Bucket 1: Core Investments

The 'core' is the larger part of an investment portfolio and could be reserved for more conservative investments. For example, this might include diversified, low-cost and easy to understand funds, bonds, shares or ETFs.

If you're new to investing, the core is a good place to start.

Core ETFs might include:

• Australian shares (index strategies)
• Australian bonds and global bonds
• Cash

Bucket 2: Satellite/Tactical Investments

The 'satellite' or tactical bucket is the smaller part of a portfolio (e.g. 0% to 30% of your entire portfolio). In this section, investors might decide to take more risk, invest in unique or unproven strategies, buy fast-growing individual shares, etc.

Tactical strategies could be higher risk, higher cost and more complicated strategies that are used in the hope of outperforming the averages (e.g. ASX 200, S&P 500, etc.).

Tactical ETFs might include:

• Australian shares (rules-based strategies)
• Global shares (rules-based strategies)
• Commodity ETFs
• Currency ETFs
• Cash ETFs
• Hedge funds

Typically, what is VLC used for?

The VLC ETF could be used by investors looking to gain focused exposure to Australia’s largest public companies. These Australian companies are likely to grow their profits over time and have a track record of paying regular, tax-effective dividends to their shareholders.

How do I invest in the MSCI Australian Large Companies Index ETF ETF?

The easiest way to buy an ETF is through your online share brokerage account. Just search for the ticker code and buy it. The following podcast explains how to buy shares and ETFs for the first time.

Meaning, you can follow the exact same process for ETFs as you do for shares -- both can be purchased in one account.

Australian Investing 101

Don't have a brokerage account for ETFs?

Read our tutorial on understanding how share brokerage accounts work.

Is VLC a good ETF?

We believe that knowing whether or not to invest in an ETF requires a lot of research, even for an ETF like this one. ETFs are long-term investments, so it's important to do the right amount of research into the ETF before you invest, and consider how it fits with your risk profile, strategy and the other investments in your portfolio.

Where you can go to find more research on this ETF:

Reports like this one on the Best ETFs Australia website were built to help you understand ETFs and to provide free access to news and research across all Australian ETFs, index funds and selected managed funds.

This report is the free version of our ETF reserach and it contains general information and should not be considered as a recommendation or personal financial advice. If you want to receive personal financial advice and have someone tailor the ETF research to you, you should speak to a financial adviser.

If you don't want to pay a financial adviser, here's what you can do:

• Before doing anything, you should always read the ETF's Product Disclosure Statement (PDS), which should be available on the ETF provider/issuer's website. The PDS explains some of the risks, the fees and other important information.

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Disclaimer: Any information contained in this report is limited to general financial advice/information only. The information should not be relied upon because it has not taken into account your specific needs, goals or objectives. Please, consult with a licenced and trusted financial adviser before acting on the information. Past performance is no guarantee of future performance. Nothing in this article should be considered a guarantee. Investing is risky and can result in capital loss. By reading this website, you acknowledge this warning, having read our Financial Services Guide (FSG) and agree to our terms & conditions available here. This article is authorised by Owen Raszkiewicz of The Rask Group Pty Ltd.