Investing can be overwhelming, especially when faced with choices like VAS and VDHG – two popular ETFs from Vanguard. If you’re unsure whether to buy one, both, or neither, you’re not alone. The latest episode of the Get Rich Slow Club dives into the differences, advantages, and considerations for each, helping you make an informed decision.
What is VAS?
VAS, or the Vanguard Australian Shares Index ETF , focuses solely on Australian shares. Its top holdings include big names like BHP, Commonwealth Bank, CSL, NAB, Westpac, and ANZ. For instance, BHP accounts for 9% of the fund, while Commonwealth Bank makes up 8%.
Tash highlights: "VAS is the only Australian ETF I know of that tracks the top 300 companies on the ASX."
This broader scope gives VAS exposure to a larger portion of the Australian market.
If you want to build your own portfolio with specific allocations to Australia and other regions, VAS is a solid option. However, as Tash notes, it's not an all-in-one solution. You'd need to pair it with another ETF, like VGS , if you wanted international exposure.
VAS performance and franking credits
As of 30 September 2024, VAS delivered decent returns: 21.77% over one year, 8.45% over three years, and 8.93% over ten years. However, investing is not without ups and downs.
Ana reminds us: "We might have years where it’s really high, like 21%, but other years it might be much lower. That’s just part of investing."
One unique feature of Australian shares, including VAS, is franking credits . Franking credits, also known as imputation credits, are a tax benefit passed on to investors. They represent the tax already paid by companies on their profits, allowing investors to offset this against their own tax liabilities.
As of 1 October 2024, 71.15% of VAS’s dividends were franked. Tash explains: "This means that of the dividend, 71% had franking credits attached."
What is VDHG?
VDHG, or the Vanguard Diversified High Growth Index ETF , seeks to be a ready-made portfolio. It’s designed to be an all-in-one solution, with 90% growth assets (like shares) and 10% defensive assets (like bonds). It includes exposure to over 16,000 companies through seven different funds, including Australian shares, international shares, hedged international shares, and emerging markets.
Interestingly, 36% of VDHG is the Vanguard Australian Shares Index Fund, a managed fund that closely mirrors VAS. Ana clarifies: "You're already covered. If you purchase VDHG, you already have VAS essentially invested."
Should you buy both?
Buying both VAS and VDHG can lead to unintended consequences.
Tash explains: "If you put $1,000 into VAS and $1,000 into VDHG, you’ve essentially increased your Australian exposure instead of diversifying further. You’re not more diversified... all you're doing is tinkering with the exposure away from that optimal diversified amount and making it highly weighted towards Australia."
While there may be reasons to increase Australian exposure , such as seeking more franking credits, it’s crucial to consider whether this aligns with your investing goals.
The DIY investor’s approach
VAS is popular among investors who want to create a tailored portfolio. Ana suggests: "You could choose to have 50% of your portfolio in VAS and 50% in VGS, or you might decide that you only want 10% in this kind of situation."
This approach gives you control but requires more effort.
On the other hand, VDHG is perhaps suited to those who prefer simplicity. VDHG is a favoured choice among those after a diversified high-growth portfolio and who don’t want to manage multiple funds.
Understanding your investments
Diversification is a cornerstone of long-term investing, and can play a significant role in deciding between different ETFs, like VAS and VDHG.
As Ana points out: "You might actually realise that you have such a large portion of your portfolio in, for example, Australia. What happens if something affects the Australian market and all of a sudden there's a lot of volatility in your portfolio?"
It’s therefore vital to assess where your investments lie to avoid unintended risks.
Tash agrees, adding: "Go and have a look at the holdings in the ETF. Understand what you're buying and why.
"Overlap can be fine – just be mindful of it.”
So, VAS or VDHG?
When deciding between VAS and VDHG, consider your investing goals, risk tolerance , and the level of effort you’re willing to put into managing your portfolio. If you want a hands-on approach with the ability to control allocations, VAS paired with other ETFs might be the way to go. However, if simplicity and diversification are your priorities, VDHG may offer a comprehensive, low-maintenance solution.
As Ana and Tash conclude: "Just do the thing. That's our message overall: just do it."
