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3 reasons why I’m avoiding Vanguard Australian Share ETF (ASX:VAS)

Vanguard has been a great addition to the investing world for investors. Low costs, diversification and easy access – what’s not to like?

However, just because Vanguard MSCI Index International Shares ETF (ASX: VGS) and Vanguard US Total Market Shares Index ETF (ASX: VTS) are good investment ideas doesn’t necessarily mean that every exchange-traded fund (ETF) it offers will generate pleasing returns.

An ETF’s performance is completely dictated by the underlying holdings, with more of its weight allocated to the larger businesses in the index.

Here’s why I’m not interested in investing in the Vanguard Australian Share ETF:

Un-diversified

Commonwealth Bank of Australia (ASX: CBA) is 7.5% of the index, Westpac Banking Corp (ASX: WBC) is 5.9% of the index, Australia and New Zealand Banking Group (ASX: ANZ) is 4.8% of the index and National Australia Bank Ltd (ASX: NAB) is 4.4% of the index. The big four banks alone make up 22.6% of the index and the biggest ten shares make up 44%.

This seems to go against the principals of diversification and actually concentrates the portfolio in a few large shares.

Royal Commission

The Royal Commission has highlighted a number of issues with the big banks. It’s going to be costly to compensate customers and the changes to the banking sector may make the sector less profitable over the long-term. This is good for customers, but bad for shareholders.

This is important because of how much of the index the big banks are. The Royal Commission and the flow-on effects could hurt not only the FY18 result, but the FY19 one too and perhaps beyond.

Poor growth

It wouldn’t be so bad if the large index constituents were growing at a nice sustainable pace like Apple, Facebook, Alphabet (Google), Berkshire Hathaway and other American giants are, but they’re not.

They have also limited themselves to Australian shores. Australia has a small population, therefore the big companies have now reached a growth ceiling that relies on population growth and/or inflation. This may generate returns that beat cash over the long-term, but I think Aussie investors can find much better shares for growing wealth on the ASX at the smaller end.

Foolish takeaway

The international-focused Vanguard ETFs are very good investment options and most regular investors would do well over the long-term by just picking and holding these. However, I’m looking to produce returns that beat the market over the long-term, which is why I’m avoiding the Vanguard Australian Share ETF.

These top shares are exactly the type of market-beating ideas that I’m looking at for my portfolio.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. 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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