It's been a rough couple of weeks for the Vanguard Australian Shares Index ETF (ASX: VAS). The ASX's most popular exchange-traded fund (ETF) was asking more than $93.40 for a unit back at the start of February.
But today, this index fund is going for $91.92 at the time of writing, down around 1.6% since 3 February. That tempers the strong start to the year that this Vanguard ETF had. Between 3 January and 3 February, Vanguard Australian Shares ETF units rose by an impressive 8.9%.
But this short-term pain could be worth it for the long-term returns that this ETF could offer.
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Long-term gains for the Vanguard Australian Shares ETF?
An index fund like the Vanguard Australian Shares Index ETF is essentially a bet on the Australian economy. That's because an index fund holds a broad collection of the largest shares in a share market.
That's the only thing that determines which shares make the cut and which don't. In this ETF's case, the portfolio consists of the 300 largest publically-listed companies in Australia.
If an ASX share underperforms over time and loses value, it will eventually get kicked out of the index during a periodic rebalancing, and thus, the ETF, only to be replaced by a better-performing company. This way, the index fund 'picks winners' over time.
As such, buying into an index fund can be a great way to expose your wealth to the prosperity of the Australian economy, all while requiring very little effort on the investors' own behalf.
The Australian economy has always risen over time. We produce more goods and services today than at any other time in history. Concurrently, our share market has never failed to exceed a previous all-time high, given enough time.
The S&P/ASX 200 Index (ASX: XJO) last all-time high was back in August 2021 – 7,632.5 points. As it stands today, we are still 'only' 2.5% away from this high watermark.
We see a similar pattern in the Vanguard Australian Shares ETF:
So the short-term pain we are seeing in both the Australian share market and the Vanguard Australian shares ETF over the past couple of weeks might actually be a good opportunity to lock in some long-term gains.
If markets keep to their historical tendencies and rise over time, then logic dictates that the lower one can buy into an index fund, the better off one will be.
