Vanguard US Total Market Shares Index ETF (ASX: VTS) is a popular investment option for many Aussies. Is it one of the best exchange-traded funds (ETFs)?
A quick overview of Vanguard US Total Market Shares Index ETF
This ETF is provided by Vanguard, one of the world’s best operators. Vanguard is owned by its investors, it shares its profit by lowering management fees further if it can. It is one of the cheapest ETF providers in the world.
Vanguard US Total Market Shares Index ETF aims to give investors exposure to the American share market. The US is where many of the world’s best businesses are based, so this ETF gives access to many of those top names like Apple, Microsoft, Amazon, Alphabet, Facebook, Berkshire Hathaway, Visa and Mastercard.
Whilst the biggest businesses get the largest allocation in the ETF, it actually has around 3,500 investment positions – making it very diverse in terms of the number of holdings.
Vanguard US Total Market Shares Index ETF has an annual management fee of 0.03%, which is one of the cheapest available to Aussies. Extremely low fees are great because it leaves nearly all of the returns in the hands of the investor.
The biggest positive has been the returns, which is ultimately what investing is all about. Over the past three years its net returns have been an average of 16.6% per annum. Over the past decade it has returned 17.1% per annum.
That level of return shows how good the underlying businesses in its portfolio are. The strength of those large tech shares has been undeniable. They seem unstoppable looking into the foreseeable future, unless there is some sort of government or regulation interference.
People may think of this ETF as a US one, but you have to remember that many of the larger businesses generate earnings from across the world. This is largely a global portfolio when you look at the underlying earnings of the holdings.
Vanguard US Total Market Shares Index ETF has an extremely low fee. Whilst 0.20% of fees or even 1% may not seem like much in one year, it can make a big difference over several years when compounding takes effect.
Many of the world’s most promising businesses choose to list in the US, so this ETF will likely always have good growth potential.
There aren’t many negatives with this ETF. But there are a few if you try to find them.
Vanguard US Total Market Shares Index ETF’s dividend yield is pretty low at just 1.6%. Several of the ETF’s largest holdings like Amazon, Alphabet, Facebook, Berkshire Hathaway and Tesla don’t pay a dividend. The valuation of the ETF has risen strongly too, pushing down the potential yield. But more growth is a good alternative.
Indeed, that valuation for Vanguard US Total Market Shares Index ETF now stands with a price/earnings ratio of 27.5x. That’s pretty hefty when you compare that to the ASX, European shares or even Asia.
The ETF offers plenty of diversification, but by being a US ETF you miss out on plenty of quality global shares like AMSL, LVMH, Tencent, Alibaba and so on. But global ETFs cost a bit more in fees, so it’s a balance of finding the right mix.
There is also the consideration of currency risks. It can add a risk to your investing when you invest in businesses that earns in different dollars and are traded in different currencies. It’s better to buy overseas shares when the Australian dollar is high. The Australian dollar is quite when when compared to the US dollar over the last couple of years. But when the Australian dollar falls it becomes more expensive to buy American shares.
I also think that the US election may cause uncertainty over the next few months, so if you’re thinking about investing, it may help to wait a few weeks first.
Vanguard US Total Market Shares Index ETF is one of the best ETFs around in my opinion. It generates good returns with very low costs. It gives exposure to some of the best businesses in the world. However, as someone who is willing to invest any type of investment on the ASX, I’m not jumping today because the US share market has run hard, looks a bit expensive and the election could be bumpy. But if you just invest in ETFs, I think this is one of the best ones to regularly invest in.