The Vanguard Australian Shares Index ETF (ASX: VAS) went through a lot of volatility during the 2022 financial year.
The VAS exchange-traded fund reached a new all-time high during FY22. It hit $97.75 in mid-August 2021 and got close to that level a couple of times over the financial year.
However, it finished the year down by just over 10% as it dropped quickly in June 2022.
For readers that don't know, the Vanguard Australian Shares Index ETF tracks the S&P/ASX 300 Index (ASX: XKO). That means the VAS ETF attempts to deliver the same returns as the ASX 300. It's one of the biggest index funds in Australia.
What ASX shares are in the VAS ETF?
As you might have already guessed, this ETF has 300 positions. But, let's look at the 10 largest holdings in the portfolio. At the end of May 2022, these were the 10 biggest allocations:
BHP Group Ltd (ASX: BHP) – 10.2% of the portfolio
Commonwealth Bank of Australia (ASX: CBA) – 8.1%
CSL Limited (ASX: CSL) – 5.9%
National Australia Bank Ltd (ASX: NAB) – 4.6%
Westpac Banking Corp (ASX: WBC) – 3.8%
Australia and New Zealand Banking Group Ltd (ASX: ANZ) – 3.2%
Macquarie Group Ltd (ASX: MQG) – 3%
Wesfarmers Ltd (ASX: WES) – 2.4%
Telstra Corporation Ltd (ASX: TLS) – 2.1%
Transurban Group (ASX: TCL) – 2%
As the investments with the biggest allocations in the Vanguard Australian Shares Index ETF, these are the ones that have the biggest influence on the returns of the fund.
An ETF simply tracks the underlying performance of the holdings. If that group of shares collectively goes down in value, then the ETF will go down as well.
What this means is that the VAS ETF dropped around 10% over FY22 because the ASX 300 collectively fell during FY22.
What happened in FY22?
There were periods of strength for the ASX 300 in the 2022 financial year, particularly in the first few months and in March and April 2022 when the iron ore price was relatively strong. This helped the earnings and share prices of names like BHP, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO).
We have also seen periods of collective strength for the big four ASX bank shares where profitability was improving, dividends were rising and the outlook appeared very healthy. We also saw share buybacks from the big banks. But now there are concerns of rising bad debts amid higher interest rates.
The year ended with a whimper as it dropped by around 9% in June 2022. That market reaction came amid rising inflation and interest rates. The Reserve Bank of Australia (RBA) increased the interest rate by 50 basis points (or 0.5%).
Why do interest rates matter? Ray Dalio, the billionaire founder of Bridgewater Associates, once said: "It all comes down to interest rates. As an investor, all you're doing is putting up a lump sum payment for a future cash flow."
