If you’ve been researching Australian ETFs, you’ve probably come across both VAS and VHY. They’re two of Vanguard’s most popular funds, and at first glance, they have plenty in common. Each is an ASX-listed ETF that trades in Aussie shares.
But they’re built with slightly different goals in mind. VAS is designed to give investors broad exposure to the Australian share market. VHY takes a more targeted approach, focusing on companies expected to pay higher dividends.
So, which one should you choose?
As with many investing questions, the answer depends less on which ETF is “better” and more on what you’re trying to achieve. The right choice comes down to your goals and the role you want the ETF to play in your portfolio.
What are VAS and VHY?
VAS is the Vanguard Australian Shares Index ETF. It’s a broad market ETF that tracks the S&P/ASX 300 Index, giving investors exposure to around 300 Australian companies across a range of industries.
VHY is the Vanguard Australian Shares High Yield ETF. It tracks the FTSE Australia High Dividend Yield Index, which selects companies expected to deliver relatively higher dividend yields. It’s considered by many to be a high-yield ETF.
Both are passive ETFs, meaning they follow an index rather than relying on active stock picking. The key difference lies in the index each fund tracks and the type of exposure that creates.
ETF comparison: VAS vs VHY at a glance
| Feature | VAS | VHY |
| Index tracked | S&P/ASX 300 | FTSE Australia High Dividend Yield |
| Approximate holdings | ~300 stocks | ~75 stocks |
| Market coverage | Broad Australian market | Higher-yielding Australian shares |
| Diversification | Broader | More concentrated |
| Yield focus | No | Yes |
| Typical use case | Core portfolio holding | Income investing |
The simplest way to think about it is this: VAS aims to own a broad slice of the Australian market. VHY aims to own the higher-income part of it.
Why some investors use VAS as a core holding
VAS is often used as a foundational Australian shares ETF because it offers broad exposure to the local market. Rather than making a bet on a particular sector or theme, you’re effectively buying a cross-section of Australia’s largest listed companies.
For long-term investors, that can be appealing. You’re participating in whatever drives returns in the Australian market over time, whether that’s dividends, capital growth or a combination of both. It’s a relatively simple “buy the market” approach that aligns with the idea that consistency can matter more than trying to pick winners.
Why some investors prefer VHY
VHY is designed for investors who place a higher value on income. Because it focuses on companies expected to pay stronger dividends, it has historically delivered higher distributions than a broad-market ETF like VAS. That can be attractive if you’re looking for regular cash flow from your investments.
The trade-off is that a high-yield strategy naturally leads to a more concentrated portfolio. Companies with larger dividend payments tend to cluster in certain sectors, particularly banks and financials. As a result, VHY isn’t simply a higher-income version of VAS. It’s a different portfolio with different risks and return drivers.
Looking beyond yield
It’s easy to focus on distributions because they’re tangible: money lands in your account and you can see the result.
But when it comes to long-term investing, yield is only part of the picture. Your actual return comes from two sources:
- Distributions paid by the ETF
- Growth in the value of your investment
Together, these make up your total return.
A fund that pays more income isn’t necessarily generating more wealth overall. If higher distributions come at the expense of future growth, total returns may end up lower than a broader market investment.
That’s not to say income isn’t important. For some investors, reliable cash flow is exactly what they’re looking for. But if your goal is long-term wealth accumulation, it can be helpful to focus on total return rather than yield alone.
Diversification matters
Both ETFs invest in Australian shares, but they provide different levels of diversification.
VAS holds around 300 companies across the Australian market. While the Australian share market itself has some concentration in banks and mining companies, VAS still offers exposure to a much wider range of businesses.
VHY holds roughly 75 companies and deliberately tilts towards higher-yielding stocks. The result is a portfolio that may generate more income, but also has more concentrated sector exposure and is more dependent on the performance of a smaller group of companies. For some investors, that’s a trade-off they’re comfortable making. For others, broader diversification may better suit their goals.
Tax considerations
If you hold either ETF outside of superannuation, distributions are generally taxable in the year they’re received. And because VHY may pay larger distributions, investors may also receive a larger annual tax bill compared to a lower-yielding alternative.
Both ETFs can distribute franking credits, which may provide additional tax benefits depending on your circumstances. Capital gains tax may apply when you sell your ETF units at a profit.
Because tax outcomes vary from person to person, it’s worth checking the latest guidance from the ATO or speaking with a qualified tax adviser if you’re unsure.
Can you own both?
Absolutely, and many investors do.
While there’s significant overlap between VAS and VHY, some investors choose to hold both because they want a blend of broad market exposure and a stronger focus on income. In this approach, VAS can serve as a core holding that captures a wide cross-section of the Australian share market, while VHY can be used to tilt part of the portfolio towards higher-yielding companies.
Holding both may also appeal to investors who like the idea of receiving relatively higher distribution amounts without allocating their entire Australian shares portfolio to a dividend-focused strategy.
That said, it’s worth remembering that adding VHY alongside VAS doesn’t dramatically increase diversification. Because many of VHY’s holdings are already included in VAS, the main effect is usually increasing your exposure to higher-yield sectors rather than broadening your market coverage.
There’s no right or wrong approach. The important thing is understanding what role each ETF plays within your broader portfolio and making sure that matches your long-term goals.
How to decide between VAS and VHY
A few questions can help clarify which ETF may suit you:
- Am I primarily focused on long-term growth or generating income today? Your answer can help determine whether a broad-market approach or an income-focused strategy is more aligned with your goals.
- Do I want broad exposure to the Australian market? Broad exposure may help spread risk across a larger number of companies and sectors.
- Am I comfortable with greater sector concentration in exchange for potentially higher distributions? Higher-yield portfolios often have larger allocations to sectors like financials, which can affect diversification.
- How would larger taxable distributions affect my situation? Depending on your circumstances, higher distributions could result in a larger annual tax obligation.
- Am I evaluating yield or total return? Looking at both income and capital growth can provide a more complete picture of an investment’s performance.
Ultimately, the better fit comes down to what you’re hoping to achieve and how you plan to invest over the long term.
So, what’s the takeaway?
VAS and VHY are both legitimate options, but they’re solving for slightly different things. If you’re looking for broad exposure to Australian shares and a simple foundation for a long-term portfolio, VAS may appeal. If generating higher levels of income is a priority, VHY could be worth exploring.
Neither ETF is universally better, and plenty of investors could make a reasonable case for either. The more useful question isn’t “Which ETF wins?” but rather “Which ETF best supports my goals?”
And remember: whichever Australian ETF you choose, it’s only one piece of a broader investing strategy. Factors like diversification, time horizon, asset allocation, investment behaviour, consistency of contributions, fees and staying invested through market ups and downs are likely to have an even bigger impact on your long-term outcomes.
General information disclaimer
This article is for general informational purposes only and does not take into account your objectives, financial situation or needs. Investing involves risk, including the risk of loss. Rules, products and market conditions can change, so consider seeking advice from a licensed professional and checking relevant official sources before making decisions.
