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Large cap, high dividend payers hold high weighting in index funds

The banks, Australian and New Zealand Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), and Westpac Banking Corp (ASX: WBC), as well as Telstra Corporation Ltd (ASX: TLS), which have been weak performers, are some of the most significant companies in the ASX indexes. The result is that the companies will have substantial weightings in index funds such as Vanguard Australian Shares Index ETF or V300AEQ/ETF (ASX: VAS).

Vanguard Australian Shares Index ETF’s top ten holdings are 43% of the total fund as at 30 April 2018. The The big four banks, Australian and New Zealand, Commonwealth Bank, National Australia Bank and Westpac are in the first five holdings by weight (including BHP Billiton Ltd (ASX: BHP)) and Telstra Corporation Ltd (ASX: TLS) is in the top ten holdings by weight.

As the share prices fall the weight in the index or ETF of the company also falls, and investors will receive whatever the performance of the index is after fees for ETFs indexed to any index.

Additionally, some of the higher dividend payers that are also big cap companies, are the top weights in many index funds focused on dividends.

ETFs such as VHIGHYIELD/ETF (ASX: VHY) that track benchmark FTSE ASFA Australia High Dividend Yield Index, the top ten holdings out of a total of 42 companies are 63% of the fund with the top five holdings by weight as follows:

Rank Holdings ASX
1 Wesfarmers Ltd WES
2 Telstra Corporation Ltd TLS
3 Westpac Banking Corp WBC
4 Commonwealth Bank of Australia CBA
5 Australia and New Zealand Banking Group ANZ

Investors in Vanguard’s High Yield ETF will also receive benchmark performance, and capital losses will be outweighed by dividend yield. It only becomes a problem if the investor sells as then there will be a realised loss or gain.

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Motley Fool contributor Rosemary Steinfort owns shares of Australia & New Zealand Banking Group Limited, BHP Billiton Limited, Telstra Limited, and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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