The Vanguard Diversified High Growth Index ETF (VDHG) has emerged as one of the most popular ETFs among Australian investors. This is especially the case amongst investors seeking long-term growth through a simple and diversified approach. It’s no surprise, then, that VDHG has resonated with the Pearler community and its investing ethos. In 2023, VDHG secured the number three spot in the top 10 most popular ETFs among the Pearler community of long-term investors.

This article digs into the reasons behind VDHG's widespread appeal. Together, we’ll explore its investment strategy; alignment with a passive investing philosophy; and why, more broadly, diversified exchange traded funds (ETFs) are popular with long-term investors.

Some background on the Pearler community

Looking at Pearler’s top 10 list – all ETFs – highlights a growing preference for simple, index-tracking options over individual stocks. This investing approach isn’t as well-liked by short-term traders , but resonates with investors who prioritise diversification and long-term growth potential.

Investors like these chiefly comprise the Pearler community. Pearler investors typically invest with an eye toward future Financial Independence, retirement planning, or wealth accumulation. And this is over decades rather than months or years. Many value investments that are straightforward, cost-effective, and align with a buy-and-hold strategy. There is a strong preference for products that offer diversification and low management fees, as these can be key to building wealth sustainably over the long term.

VDHG's popularity could be because of its alignment with these investing principles. Many of the top ETFs on the list share similarities in their holdings and providers. However, VDHG tends to stand out for its unique blend of assets and focus on growth-oriented investors.

Getting to know VDHG

At its core, the Vanguard Diversified High Growth Index ETF is designed for investors looking towards the horizon, aiming for substantial growth over the long term. It provides investors with a diversified portfolio within a single ETF.

VDHG seeks to track the weighted average performance of various ETFs it invests in. Instead of tracking and holding companies of a specific index (e.g. ASX 200) like other ETFs, it invests in other ETFs. For example, 35% of VDHG's portfolio is invested in the Vanguard Australian Share Index and 27% is in the Vanguard International Shares Index Fund. In short, VDHG is a growth-focused ETF that tracks other ETFs. It's the type of ETF Warren Buffett would swear by (although as we haven't asked him directly, we can't say for certain).

VDHG’s purpose

The primary purpose of VDHG is to offer investors a convenient way to access a broadly diversified, high-growth portfolio. It aims to simplify the investment process, so investors can be more hands-off and not worry about managing and rebalancing multiple holdings. This allows long-term investors to invest in a wide range of assets through a single transaction, making it easier to maintain a diversified portfolio.

VDHG is tailored for those who are focused on capital gains over several years or decades. Its strategy is built around the principle of growth compounding over time, making it an option for investors looking to save for retirement, build wealth, or other long-term financial goals.

VDHG’s investment strategy

Diversification is the foundation for the Vanguard Diversified High Growth Index ETF, spreading investments across a wide range of asset classes. This diversified approach is designed to limit risk while giving the investor exposure to different markets for growth opportunities.

VDHG invests mainly in a mix of Australian and international shares . This high exposure to shares is in line with its high-growth objective, catering to investors who have a longer time frame and can tolerate volatility. The portfolio also includes bonds, cash, and real (tangible) assets like real estate, adding a layer of stability and income to the portfolio.

Why VDHG is popular among long-term investors

For many long-term investors, the quest for a diversified, growth-oriented portfolio leads them to consider options like the Vanguard Diversified High Growth Index ETF. As we mentioned above, this ETF can be compelling as it simplifies the diversification process and targets long-term capital growth – an increase in the asset value over time. Let’s look at the qualities of VDHG that attract long-term investors.

Alignment with long-term investment goals

As we detailed earlier, the structure of VDHG provides broad exposure to a range of asset classes, focusing on shares (a.k.a. equities). Historically, equities have had higher returns over long periods compared to other assets. (NOTE: this is where we throw in the caveat that past performance isn’t a reliable indicator of future performance.) The trend of high growth over a longer time horizon aligns well with long-term investor objectives, aiming to grow their wealth over decades. VDHG’s strategy of targeting a diversified mix of assets globally can mean less reliance on the performance of any single market or sector. This diversification can potentially smooth out returns over time.

Simplicity and efficiency

Another characteristic of VDHG that attracts long-term investors is its simplicity. By investing in a single ETF, investors gain exposure to a balanced portfolio. This means less time commitment is required for an investor to build and maintain such a diverse portfolio. This convenience is particularly appealing to those who prefer a low-touch passive investing approach. As a result, they can focus on other aspects of their finances or spend more time doing the things they enjoy.

Cost considerations

VDHG offers the advantage of relatively low management fees. This is especially true when compared to actively managed funds , or the costs of buying and managing multiple funds to achieve similar diversification. For long-term investors, even small differences in fees can have a big impact on returns over time, making cost-efficient investments like VDHG attractive.

The risks involved

Like all investments, VDHG comes with its own set of risks for investors to consider before investing. The fund’s heavy asset allocation to equities means it can be influenced by ups and downs in the market. While these risks are a trade-off for the potential of higher long-term returns, before buying, make sure you’re comfortable with this volatility.

The diversified nature of VDHG also means it won’t always outperform more focused investments in the short term. If targeted exposure to specific sectors or markets is what you’re looking for, VDHG might be too broad for your preferences.

With its global exposure, another risk to consider is how external economic factors in global markets can impact your investment. Think about how willing you are to accept this added uncertainty.

Why long-term investors favour diversified ETFs

The Vanguard Diversified High Growth Index ETF is an example of what’s known as diversified ETFs . Diversified ETFs have become a more popular investment type for many investors in recent years. These funds offer a blend of accessibility, cost efficiency, and the potential for growth through diversification, making them a go-to option for those wanting to build wealth with a long-term view.

Qualities of a diversified ETF

Here are several characteristics that make diversified ETFs a favourite for long-term investors:

Characteristic	What this means for investors
Accessible	Diversified ETFs make it easier for investors to invest in a broad range of assets through a single transaction. This simplicity benefits both beginner and seasoned investors as it saves them the trouble of buying individual stocks, bonds, or other assets to achieve diversification.
Liquid	Like stocks, ETFs are bought and sold on stock exchanges , such as the ASX. This offers liquidity, allowing investors to buy and sell shares throughout the trading day with relative ease.
Cost efficient	A critical factor for long-term investors is the impact of fees on investment returns. Diversified ETFs are known for their low expense ratio compared to actively managed funds where asset managers aim to outperform an index. This stems from the passive management approach of most diversified ETFs. That means they track a specific index or basket of assets without attempting to outperform the market through active trading. Over time, the lower fees can result in savings and a larger compound growth effect on an investor's portfolio.
Manages risk through diversification	By nature, all ETFs are diversified to some degree. However, a diversified ETF provides an added level of diversification by investing across a broader range of assets, industries, or geographic markets. By offering greater diversification, market movements tend to have less impact on a diversified ETF compared to an ETF focused on an asset class, sector or region.

Alternative diversified ETFs to VDHG

In addition to the Vanguard Diversified High Growth Index ETF, there are several diversified ETFs available to long-term investors as alternatives to VDHG. Here are a few:

• BetaShares Ethical Diversified High Growth ETF (DZZF) – targets investors seeking growth through a portfolio that meets strict ethical criteria, excluding sectors like fossil fuels, gambling, and tobacco.
• Vanguard Diversified Growth Index ETF (VDGR) – aims for balanced growth through a mix of asset classes, focusing on a slightly lower risk profile than high-growth options.
• BetaShares Diversified All Growth ETF (DHHF) – offers an aggressive growth strategy by investing entirely in equities, both Australian and international, for those with a higher risk tolerance.
• BetaShares Ethical Diversified Growth ETF (DGGF) – provides growth-oriented investors with a diversified mix of ethical assets, balancing risk and return while sticking to responsible investment criteria.

If you're looking to invest in a diversified ETF, these are just some of the options you could consider. Before adding any to your portfolio, take your time to understand each and explore the other diversified ETFs available on the ASX.

VDHG for long-term investing – a wrap up

The Vanguard Diversified High Growth Index ETF provides a pathway for investors who want diversified exposure to growth assets. Its comprehensive, all-in-one structure can be appealing to those looking for a simple investment strategy without sacrificing diversification. However, choosing whether to include VDHG in your investment portfolio depends on your investment objectives, risk tolerance, and financial situation.

Consider your long-term goals and how a high-growth, diversified ETF like VDHG fits within their overall investment strategy. And if you’re unsure, it’s a good idea to do your research and seek professional financial advice to help you on the journey.

Happy investing!