The Vanguard Australian Shares Index ETF (ASX: VAS) is one of the most popular exchange-traded funds (ETFs) in Australia, for good reason. There's a lot to like. However, there are a few potential drawbacks to keep in mind as well.
As an index fund, its job is to track the S&P/ASX 300 Index (ASX: XKO), which is a group of 300 of the biggest businesses listed on the ASX.
The largest businesses in market capitalisation terms have the largest weightings in the portfolio, such as BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL).
Let's have a look at some of the positives and negatives, in my opinion, of the VAS ETF.
Positives
The Vanguard Australian Shares Index ETF comes with pretty good diversification – it's invested in 300 businesses. It has a stake in blue chips such as Woolworths Group Ltd (ASX: WOW) and Telstra Group Ltd (ASX: TLS) as well as the smallest ASX 300 shares like Australian Ethical Investment Ltd (ASX: AEF) and Temple & Webster Group Ltd (ASX: TPW), and everything in-between.
The VAS ETF has a low management fee, it's one of the cheapest ETFs in Australia. Vanguard currently offers this investment option for an annual management fee of 0.10%. The lower the management fee, the more the returns that stay in the investor's hands.
It offers a solid dividend yield – according to Vanguard, the ETF has a yield of 4.4%. Franking credits are a bonus on top of that yield.
The returns of the VAS ETF have been decent. Since its inception in May 2009, it has made an average return per annum of around 9%, with 4.6% of that being from distributions.
Negatives
The VAS ETF is invested in lots of businesses, but it is heavily weighted to financials and materials. According to Vanguard, the financials had a weighting of 27.2% at 30 April 2023, while the materials allocation was 24.2%.
This means that over half of the portfolio is invested in just two sectors, which are not typically the sectors that deliver strong compounding growth year after year. I think this is a key reason why the VAS ETF has underperformed a number of international index funds, which deliver more capital growth.
For example, the Vanguard MSCI Index International Shares ETF (ASX: VGS) has made an average return per annum of 11.8% since it started in November 2014.
I also think it's worth noting that the Vanguard Australian Shares Index ETF doesn't give much exposure to the global economy, whereas iShares S&P 500 ETF (ASX: IVV) is invested in just US businesses, but names like Apple and Microsoft generate earnings from almost every country in the world.
So, while the VAS ETF isn't a bad option, if I'm investing with an ultra-long-term mindset, there are other ETFs I'd rather put into my portfolio that could make stronger returns.
