The Vanguard Australian Share ETF (ASX: VAS) share price has fallen around 10% over the past six months.
That’s a pretty hefty fall for an index fund, so perhaps it’s now worth considering if it as a buy.
Vanguard has been one of the best things to ever be created for regular investors. It provides low-cost access to various index funds. Some of its most popular other exchange-traded fund (ETF) options include Vanguard MSCI Index International Shares ETF (ASX: VGS) and Vanguard US Total Market Shares Index ETF (ASX: VTS).
Investors can become very wealthy by just achieving the market average returns.
Compared to the other Vanguard ETFs, the Australian ETF offers a much higher dividend yield and it also comes with imputation credits called franking credits.
The Vanguard Australian Share ETF has an annual management fee cost of only 0.14% per annum. This is one of the lowest management fee costs for an Australian portfolio investment. The lower costs means there’s more net returns left for our portfolios, allowing greater compounding of our wealth.
I also like that we can get significant diversification with just one investment. By getting the returns of the S&P/ASX 300 Index we are getting exposure to 300 different businesses such as Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS), BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL) and Macquarie Group Ltd (ASX: MQG), along with many smaller ones.
Most of the biggest businesses in the index have faced their own valuation hits in recent times. The big banks like Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have been tarnished due to the Royal Commission. Telstra is suffering from competition in mobile and broadband. CSL and Macquarie shares have dropped on worries about the stability of the US.
Looking at it as a group of businesses, now could actually be a pretty good time to buy to the Vanguard Australia Share ETF.
But, there are three major reasons why I’m not particularly drawn to this ETF at this stage.
The first reason is that it isn’t very diversified, as far as ETFs go, because a large percentage of the portfolio is invested in banks.
The second reason is that the biggest holdings don’t have great growth prospects for the medium-term. Shares like Wesfarmers Ltd (ASX: WES), CBA and Telstra are mature businesses that already dominate their industries. They can only keep growing at a decent pace if they head overseas or create new business segments.
The third reason is that I believe there are even better investment opportunities out there than the Vanguard Australia ETF at the current prices.
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers 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.