Is it time to buy Vanguard Australian Share ETF (ASX: VAS) at this price?
The ETF’s returns are a reflection of the returns generated by the ASX 300. Therefore, the ETF allocates the most to Australia’s biggest blue chips including Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Woolworths Group Ltd (ASX: WOW), Wesfarmers Ltd (ASX: WES), Macquarie Group Ltd (ASX: MQG) and Telstra Corporation Ltd (ASX: TLS).
The last year has been a good one for Australian shares. In the 12 months to 31 October 2019, the Vanguard Australia ETF generated total returns of 19.4% which comprised capital growth of just over 14% and distribution returns amounting to a little more than 5%.
The Liberals winning the election, APRA reducing the home loan interest rate buffer, the RBA reducing interest rates and house prices recovering have boosted the local share market. The resources industry continues to perform quite strongly with decent iron ore prices and oil prices, although coal prices have dropped off.
Is it a good idea to buy an ETF at close to all-time highs?
I’m in two minds about this. Share markets will keep reaching new highs over time, the ASX is higher than it was 20 years ago, 30 years ago and so on. So it wouldn’t the worst thing in the world to buy today.
However, Australia’s share market has had a number of one-off boosts that can’t be repeated again without the valuations going into unsustainable territory.
The income returns provided by the ETF have been reduced after dividend cuts by Westpac and NAB, as well as a franking credit reduction by ANZ.
There are a few solid businesses at the large end of the ASX like CSL and Macquarie, but to me it seems the earnings growth prospects are very limited for the ETF. I wouldn’t want to buy it today, I’d much rather invest in Vanguard FTSE Asia Ex Japan Shares Index ETF (ASX: VAE) or BetaShares FTSE 100 ETF (ASX: F100).
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Tristan Harrison owns shares of VANGUARD FTSE ASIA EX JAPAN SHARES INDEX ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited and Wesfarmers 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.