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Is the Vanguard Australian Share ETF the best long-term ASX investment?

Is the Vanguard Australian Share ETF (ASX: VAS) the best long-term ASX investment?

Vanguard Australian Share ETF is an exchange-traded fund (ETF) that is invested in around 300 ASX shares. Indeed, its aim is to track the S&P/ASX 300.

What is Vanguard?

Vanguard is an investment business like many others. However, there is a significant difference. The owners of Vanguard are the investors, it shares the profit with investors by lowering the costs as much as possible.

Lower costs is a great outcome because fees can be a big influence on the net returns. The lower the fee, the higher the net return.

Fees

The ETF has an annual management fee of just 0.10%, that’s one of the lowest-costing portfolio investment options for ASX shares.

That fee is so low that it barely reduces the overall return at all. There’s a chance it could go even lower as the ETF gets bigger and there are even more scale benefits.

Diversification

One of the main reasons to consider ETFs is that they offer really good diversification. Vanguard Australian Share ETF is invested in 300 ASX shares, though there is a large allocation to financials and resources shares. That’s not the most attractive diversification, particularly as the largest two sector allocations aren’t with areas with big growth potential like technology. 

Financials has a 26.9% allocation and materials has a 19.5% allocation. Healthcare is the only other sector with an allocation of more than 10% with a 12.2% holding.

Its top 10 holdings at 30 June 2020 were: CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), Macquarie Group Ltd (ASX: MQG) and Transurban Group (ASX: TCL).

However, I think as newer businesses, like Afterpay Ltd (ASX: APT), grow and become bigger influences on the index then Vanguard Australian Share ETF will become more appropriately diversified.

Returns

The ETF hasn’t been a very strong performer over the past decade, with Australia’s ASX blue chips struggling to generate meaningful shareholder returns with the Hayne royal commission and now COVID-19 hurting earnings.

Over the past decade Vanguard Australian Share ETF has returned an average of 8.2% per annum. The last five years have been even more disappointing with an average return per annum of 5.9%.

It’s particularly disappointing that most of the return over the past five years – 4.35% per annum – has just been the income paid by the ETF. There has been hardly any capital growth.

Distribution yield

ASX shares are known for being generous dividend payers. Vanguard Australian Share ETF has a distribution yield of 4.1% according to Vanguard, not including the franking credits, which would make the grossed-up yield above 5%.

That’s a solid yield considering the official RBA interest rate is just 0.25%. I’d rather receive dividends than get a tiny amount of interest from the bank account.

Is Vanguard Australian Share ETF a buy?

If you want a passive way to invest into ASX shares then I think this could be one of the simplest ways to do it. It’s a good way to almost match (less fees) what the ASX 300 index does. ASX shares have performed well over the decades.

However, I think there are plenty of diversified investment options that could offer better long-term growth. ASX banks like CBA, which are a big part of the index right now, offer little compound growth potential in my opinion, however I think an ETF like BetaShares Global Quality Leaders ETF (ASX: QLTY) could deliver long-term growth with the types of businesses that it’s invested in.

Where to invest $1,000 right now

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*Returns as of June 30th

Tristan Harrison has no position in any of the stocks mentioned. 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. The Motley Fool Australia owns shares of AFTERPAY T FPO, Transurban Group, 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.

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