The Vanguard Australian Shares Index ETF (ASX: VAS) is an exchange-traded fund (ETF) that gives investors the ability to invest in ASX blue chip shares. There are a number of reasons why it could help someone retire early – low fees, diversification, and compounding.
Its job is to track the S&P/ASX 300 Index (ASX: XKO) which is a group of 300 of the largest businesses in Australia. The VAS ETF also has a portfolio of (around) 300 holdings.
Just looking at the number of businesses in the portfolio suggests good diversification. Certainly, having sufficient diversification is one of the important elements in lowering risk. But there's more to diversification than just the number of holdings. It's also important to consider what types of businesses the fund is invested in.
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Strong exposure to the Australian economy
When we look at the biggest businesses in the Vanguard Australian Shares Index ETF portfolio, they are mainly from two sectors that Australia excels at – resources and banking.
Most people will be familiar with the names I'm about to mention: BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), Macquarie Group Ltd (ASX: MQG), Woodside Energy Group Ltd (ASX: WDS), Rio Tinto Ltd (ASX: RIO), and Fortescue Metals Group Ltd (ASX: FMG).
At the end of April 2023, more than 51% of the VAS ETF portfolio was invested in just financials and materials. That's probably not surprising considering how many resources Australia sells and how important the property market is for the economy.
But there are advantages and disadvantages to this high level of exposure to those sectors.
Many of these businesses have fairly low price/earnings (p/e) ratios and quite high dividend payout ratios. This usually results in a rewarding dividend yield for investors. According to Vanguard, the VAS ETF has a dividend yield of 4.4.%, which doesn't include the franking credits.
However, these sorts of businesses aren't known for strong capital growth and, as such, the compounding potential might be less. If I were looking to retire early, I'd want to try to grow my nest egg with a good amount of capital growth. Remember, dividends are taxable when received each year, assuming that person has a tax rate of more than 0%.
Let's compare the returns of the Vanguard Australian Shares Index ETF against one of Vanguard's other main ETFs – the Vanguard MSCI Index International Shares ETF (ASX: VGS).
Lower returns
Past performance is not a reliable indicator of future performance, but I think we can see the difference between a more growth-focused ETF like the VGS ETF (purple) and the ASX blue chip-focused VAS ETF (blue).
Let's also look at how the VAS ETF unit price has changed since COVID-19 – it's currently almost where it was just before COVID-19 hit, whereas the VGS ETF has gained around 15%.
Over the five years to April 2023, the Vanguard MSCI Index International Shares ETF has returned an average of 11.1%, with 8.7% of that per annum being capital growth.
In the five years to April 2023, the Vanguard Australian Shares Index ETF has returned 8.2% per annum, with over half of that (4.7%) being distributions (which are taxed). However, that level of returns can still deliver decent wealth-building for investors and the unit price of around $90 could be a good starting point for investing.
I'm certainly not saying that VAS ETF is a terrible investment. But for investors trying to grow their wealth for retirement, I think there could be better options. However, I will say that Vanguard Australian Shares Index ETF is an effective way to invest in the Australian economy for a low management fee of just 0.10%.
But I'd look to other ETFs as potentially better investment options for longer-term growth.
