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How the Vanguard Australian Share Index ETF can fund your retirement

If the latest travails of Bellamy’s Australia Ltd (ASX: BAL), Sirtex Medical Limited (ASX: SRX) and Vocus Group Ltd (ASX: VOC) tell us anything, it’s that stock-picking is not for the faint hearted. Even when investors conduct all due diligence, they sometimes get it wrong.

Although every investor aims to find big winners like Blackmores Limited (ASX: BKL) and Fortescue Metals Group Limited (ASX: FMG), incurring big losses is also a real prospect of investing. The quicker one realises this, the more one can do to mitigate the risks associated with it through diversification and active portfolio management.

Enter, the Vanguard Australian Share ETF (ASX: VAS) (“the Fund”).

The Fund

The Vanguard Group is the world’s largest investment management company, specialising in managing index funds which track global indices.

The Fund is an exchange-traded fund (ETF) which mimics the S&P/ASX 300 Index (ASX: XKO), meaning Vanguard expects the Fund to generate the same returns as Australia’s top 300 stocks.

Whilst other ETFs like BlackRock managed iShares MSCI Australia 200 (ASX: IOZ) and UBS managed UBS IQ Research Preferred Australian Share Fund (ASX: ETF) offer investors similar choice, the reason I prefer Vanguard’s product is its costs.

Vanguard charges a management fee of 0.14% on funds under management which compares favourably to the ETFs managed by BlackRock and UBS (which charge 0.19% and 0.7% respectively).

Although the difference may seem immaterial at first, over time it can really add up and be the difference between a normal and lavish retirement.

Looking forward

Whilst retirement may be many moons away for you, it’s important to remember that your biggest ally until retirement is something you can’t buy – time. The power of compounding returns means the longer investors can ride market gyrations, the more likely they are to experience above-average gains at retirement.

Given the Fund does not select specific stocks, but instead, positions its portfolio to mimic returns generated by the S&P/ASX 300 Index, the key to help fund your retirement is getting in early. This is so your investment has time to grow over the long term.

The short-term benefits

Whilst delayed gratification is not everyone’s cup of tea, the Fund also offers short-term benefits through instant diversification and a handy income stream.

As at 31 December 2016, the Fund held 46.6% of its investments in Australia’s 10 biggest companies, comprising the big 4 banks, BHP Billiton Limited (ASX: BHP), CSL Limited (ASX: CSL), Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS), amongst others. The remainder of funds were invested in constituents of the S&P/ASX 300 Index, providing a one-stop diversified portfolio of Australian stocks.

Last year, the Fund paid quarterly distributions equating to approximately 4.73% per annum and recorded capital growth of 6.87% to provide a total return of 11.60% for the year. Not a bad result considering the average term deposit yields 3%.

Foolish takeaway

Whilst investing in shares will never be as safe as cash in your bank account, I believe the Fund provides the next best alternative to help sustain your retirement lifestyle.

Through the benefits of diversification and compounding returns, the Fund should be able to outperform most passive investments over the long-term, providing you with the spending power you need to fund your retirement.

This makes it a buy in my books.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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