Vanguard Australian Share ETF (ASX: VAS) is one of the biggest and most popular ETF investments for Aussie investors. But should you buy it?
A quick overview of Vanguard Australian Share ETF
An exchange-traded fund (ETF) allows you, through a stock exchange, to buy a fund which enables you to own lots of assets in a single investment.
This particular one aims to track the S&P/ASX 300 Index (ASX: XKO). So you get the exposure to the large caps like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP) and CSL Limited (ASX: CSL). But you also get a little bit of exposure to names like ELMO Software Ltd (ASX: ELO), Integrated Research Limited (ASX: IRI) and Lovisa Holdings Ltd (ASX: LOV).
It has an annual management fee of 0.10% per annum. This is one of the lowest that ASX investors can get access to.
Why it's a good investment
One of the best reasons to consider Vanguard ETFs is that they have extremely low fees compared to their active management competitors. The lower the fees, the more net returns that are left in the hands of the investors like you and me.
Diversification is a key part of investing in ETFs. Diversification is great at lowering company-specific risks if you own hundreds of businesses. Vanguard Australian Share ETF gives you exposure to 300 names for a very cheap fee.
Australia has been a good place to be invested over the past century, giving returns of about 10% per annum. Perhaps Australia won't be the best place over the next 100 years, but I expect it will do reasonably well for ASX investors.
During normal, non-COVID-19 times, the ASX is a good place for dividend income because of the fairly high dividend payout ratios as well as the bonus of franking credits. However, banks in-particular are paying out smaller dividends at the moment because of the COVID-19 recession.
Why I believe there are better alternatives
The Vanguard Australian Share ETF is weighted towards the largest businesses in Australia which are typically resource businesses like Rio Tinto Limited (ASX: RIO) and banks like Westpac Banking Corp (ASX: WBC). Australia has been the lucky country for a long time. But I don't think these are the best industries to be invested in for the coming years and decades ahead.
There are some promising smaller ASX shares like A2 Milk Company Ltd (ASX: A2M), REA Group Limited (ASX: REA) and Magellan Financial Group Ltd (ASX: MFG). But they don't move the needle enough to make a large impact on the returns of the ETF.
For me, there are better alternatives. You don't have to pick individual shares yourself. There are other ETFs and listed investment companies (LIC) that offer more growth potential in my opinion.
These other options may have higher management fees, but it's the net returns that I'm focused on. More earnings growth will hopefully continue to generate better investment returns.
I prefer other portfolio investment options like Betashares Global Quality Leaders ETF (ASX: QLTY), BetaShares Global Sustainability Leaders ETF (ASX: ETHI), WAM Microcap Limited (ASX: WMI), Ophir High Conviction Fund (ASX: OPH), MFF Capital Investments Ltd (ASX: MFF), Magellan Global Trust (ASX: MGG) and Magellan High Conviction Trust (ASX: MHH).
I think all of the above options would make better long-term investments than Vanguard Australian Share ETF, aside from any short-term US election volatility. In my opinion, the above options provide more growth potential than what ASX blue chip shares can provide.
Over the long-term, I believe it's growth of earnings that help deliver the best returns for investors. If you want Australian dividends, then I think ASX shares like Brickworks Limited (ASX: BKW) could be more reliable options.
