Investing in exchange-traded funds (ETFs) is popular for good reason. They can be simple, cost-effective, and offer instant diversification. Among Australian investors, Vanguard MSCI International Shares ETF and Vanguard Diversified Growth Index ETF are often compared. Both ETFs are managed by Vanguard and provide different approaches to investing. But which one is better suited to your goals?

In this article, we’ll break down the key differences between VGS and VDGR, helping you understand what each offers. Whether you're focused on growth, diversification, or balancing risk, getting clued up can help you make a more informed decision.

Overview of Vanguard MSCI International Shares ETF

Vanguard MSCI International Shares ETF (VGS) offers investors exposure to international shares, focusing on large companies from developed markets outside Australia. It tracks the MSCI World ex-Australia index , giving you access to global brands like Apple, Microsoft, and Nestle.

The ETF aims for long-term growth by investing in these companies. It's diversified across sectors such as technology, healthcare, and consumer goods. VGS primarily focuses on capital appreciation rather than income.

Key metrics:

• Fees : VGS has relatively low management fees, keeping costs down.
• Historical performance : It delivers growth that aligns with global market trends.
• Dividend yield : VGS pays dividends, but it's more focused on growth.
• Market cap : The companies in VGS are large, well-established firms.

This ETF can be suitable for investors looking for broad exposure to global markets, focusing on growth over income. Its international reach makes it popular with Australian investors who want to diversify beyond domestic shares.

Overview of Vanguard Diversified Growth Index ETF

Vanguard Diversified Growth Index ETF (VDGR) offers a diversified portfolio, blending international and Australian shares with defensive assets like bonds and cash. It aims to balance growth and stability by investing approximately 70% in growth assets (shares) and 30% in defensive assets (bonds, cash).

VDGR's mix of assets makes it less volatile than a pure equity fund like VGS, potentially providing more stability during market downturns. This can appeal to investors seeking steady growth with lower risk than a fully equity-based ETF.

Key metrics:

• Fees : VDGR's fees are slightly higher due to its broader asset mix.
• Historical performance : It delivers more stable returns compared to pure growth ETFs like VGS.
• Asset allocation : 70% growth (shares), 30% defensive (bonds and cash).

VDGR's diversified approach offers growth potential while cushioning against market fluctuations, appealing to those who want a mix of asset classes in their portfolio.

Cost considerations of VGS vs VDGR

Let’s talk fees. VGS generally has lower management fees because it's focused on international shares. VDGR charges slightly higher fees because it's more diversified – blending shares, bonds, and cash. So, while you're paying a bit more with VDGR, you’re also seeking to get that extra layer of stability through defensive assets.

Why does this matter? Over time, fees can chip away at your returns. Here’s an example. Say you invest $10,000 in VGS with a fee of 0.18% per year. After 10 years, if VGS averages (for example) 7% annual growth, you’d have paid about $350 in fees.

Now, let’s say VDGR’s fee is 0.27%. That same $10,000 growing at the same 7% would have resulted in closer to $520 in fees. It’s not a huge difference, but it adds up. Over 20 or 30 years, those extra fees can make a noticeable dent.

VGS keeps costs lower, but VDGR offers broader diversification, which could feel worth the higher fee for some investors. Think about what you value more – keeping costs down or balancing growth with a bit more diversity.

Risk and volatility

VGS and VDGR offer different experiences and carry risk in varying degrees. As mentioned, VGS is fully invested in international shares, which brings concentration risk from a single asset class. This means it's more exposed to market ups and downs, making it riskier but potentially more rewarding in a bull market .

VDGR is a bit more balanced. With 30% of its portfolio in defensive assets like bonds and cash, it tends to be less volatile. So, when markets dip, VDGR might not drop as much as VGS. VGS may therefore be more suited to investors who can handle short-term swings for long-term growth.

Let’s look at how they might behave during different market conditions.

In a strong bull market, where global stocks are soaring, VGS is likely to outperform VDGR. Because VGS is fully invested in international shares, it captures more of the market’s growth. However, this also means that when a market correction or crash happens, VGS will likely see sharper declines. For example, during the COVID-19 market crash in early 2020, global equities dropped significantly, and a fund like VGS would have taken a bigger hit.

VDGR, with its 30% allocation to defensive assets like bonds, wouldn’t have been as hard hit in the same scenario. Bonds tend to hold their value, or even increase, during market downturns, which helps soften the blow. But remember that past trends in investment movements aren’t a reliable indicator of future outcomes.

Understanding how much risk you’re willing to take on – and how much volatility you can stomach – will help you decide which ETF fits better with your investment goals.

Target investor profiles

When deciding between VGS and VDGR, it’s important to consider your investment goals, risk tolerance , and time horizon. Each ETF is suited to different types of investors based on these factors.

Who might choose VGS?

VGS is designed for investors who prioritise long-term growth and are comfortable with higher risk and volatility. If you have a long investment horizon – say, 10 years or more – and you can weather market ups and downs, VGS might align with your outlook. This ETF is more suited to growth-focused investors who want exposure to global companies and are less concerned about short-term market fluctuations.

For example, younger investors or those building wealth over decades may lean toward VGS. Its potential for higher returns could align well with long-term goals like retirement savings or wealth accumulation.

Who might choose VDGR?

VDGR is for investors who want a balance between growth and stability. Its 70% allocation to shares provides growth potential, but its 30% defensive asset allocation (bonds and cash) seeks to reduce risk compared to VGS. VDGR appeals to those who prefer steadier returns, particularly during market downturns, while still aiming for growth over the long term.

Investors closer to retirement, or those who prefer a balanced approach with some downside protection, may prefer VDGR. This ETF can fit well in portfolios that aim to balance growth with risk management. This could be a conservative growth strategy where safety is as important as returns. It’s a good option for investors looking for moderate risk but who still want exposure to equities.

How each ETF fits within portfolio strategies

For a purely growth-focused strategy, VGS is designed to fit the bill. It seeks to maximise capital growth by focusing solely on international shares, making it popular with investors who can afford to take on more risk for the potential of higher returns. VGS may typically be part of a more aggressive portfolio, where short-term volatility is expected but the long-term rewards are the goal.

VDGR, however, may align more with a balanced portfolio strategy. With its mix of growth and defensive assets, it aims to offer a smoother ride during volatile markets. This makes it appealing to investors seeking growth but with a bit of safety. VDGR can also serve as the core of a diversified portfolio , providing exposure to both shares and bonds. This could potentially help manage concentration risk while still delivering growth.

Of course, these ideas are all general in nature, and don't account for your specific circumstances. For proper guidance, speak with a financial adviser.

Performance comparison

When comparing the performance of VGS and VDGR, keep in mind that past performance doesn’t guarantee future results. However, reviewing historical trends can give you an idea of how each ETF has behaved in different market conditions.

Historical performance at a glance

• VGS has typically delivered higher returns during strong market periods, as it’s fully invested in international shares. Its growth potential is strong, but with that comes more volatility.
• VDGR has shown more consistent returns due to its diversified asset mix. While it may not match the highs of VGS, its defensive assets help cushion losses during downturns.

Returns vs volatility

• VGS : Higher potential returns but more volatility. During market booms, VGS can outperform, but it can also drop significantly in a downturn.
• VDGR : Lower volatility characteristics thanks to bonds and cash. This can provide smoother, more stable returns over time, though it may underperform during rapid market growth.

Key considerations

As we’ve said, when deciding between VGS and VDGR, consider your growth expectations and comfort with risk. If you're seeking higher growth and can tolerate market swings, VGS might meet your expectations. If you prefer steadier, less volatile returns with some downside protection, VDGR could be a more comfortable fit.

Final considerations

When choosing between VGS and VDGR, reflect on your investment objectives and risk tolerance. Both ETFs serve different purposes and cater to different types of investors. To help make a more informed decision, ask yourself:

• Am I aiming for higher growth and can handle more risk?
• Do I prefer a more balanced approach with some protection against market volatility?
• What is my investment timeline? Am I investing for the short-term or long-term?
• How much exposure do I want to international shares versus a mix of growth and defensive assets?
• How will either ETF fit into my overall portfolio? Do I need more growth or more stability?

Remember, neither ETF is inherently better than the other. Both are valuable tools within a broader portfolio, but the right choice is unique to you. Whether you lean towards VGS or VDGR, each ETF can play a role in helping you achieve your financial objectives.

You might also consider investing in both VGS and VDGR to diversify further. Or maybe, after looking closely at each, you may choose neither if other investments align better with your goals and risk preferences.

And if you need some guidance to decide between these two similar ETFs , consider contacting a financial adviser. Be sure they’re covered by an Australian financial services licence to receive sound and qualified advice that’s appropriate for you.

VGS vs VDGR: which one’s your match?

VGS and VDGR each bring something different to the table. VGS offers growth, while VDGR offers a more balanced ride. The question is: what do you need more of in your portfolio – higher growth or stability? To compare the two options side by side, feel free to use Pearler’s compare tool .

As you explore these investments, think about your goals, how much risk you’re comfortable with, and how long you plan to invest. You could go with one, both, or neither. It’s comes down to what suits your strategy. There’s no right or wrong – just what works best for you. You have the power to pave your own investment journey.

Embrace the ride!