The Vanguard Australian Shares Index ETF (ASX: VAS) is the most popular exchange-traded fund (ETF) on the ASX in terms of the amount of household money that has been put into the fund. I'm going to outline why I prefer to own VAS ETF units over buying Commonwealth Bank of Australia (ASX: CBA) shares.
There are a few things to like about CBA. The ASX bank share has demonstrated long-term strength, it's the leader of the sector and it has a solid grossed-up dividend yield of around 5.75% for FY24, according to (independent) estimates on Commsec.
While investors may be attracted to CBA shares because of their ASX blue-chip status, I think investors would be better off with the VAS ETF because of three key reasons.
Diversification
The Vanguard Australian Shares Index ETF represents a portfolio of 300 businesses because it tracks the S&P/ASX 300 Index (ASX: XKO).
If a new investor were about to enter the share market and decided to buy CBA shares, then their entire portfolio would be invested in CBA shares.
With the VAS ETF, the money is spread across 300 names, and we get decent exposure to CBA within the portfolio. But, it also comes with ownership of Westpac Banking Corp (ASX: WBC) shares, ANZ Group Holdings Ltd (ASX: ANZ) shares, National Australia Bank Ltd (ASX: NAB) shares and so on.
Plus, there are all the other sectors represented in the portfolio as well like BHP Group Ltd (ASX: BHP), CSL Ltd (ASX: CSL), Telstra Group Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES), which owns Bunnings.
By having the invested money in a whole portfolio, we're spreading the risk.
Growth
CBA has done very well for shareholders over the last three decades. However, it's now a giant with a market capitalisation north of $175 billion. The bigger a business becomes, the harder it is for it to grow at a strong rate and deliver outperformance compared to the market.
Not only does its large size make outperformance harder, but the banking sector faces a lot more competition.
The rise of internet banking has made it possible for new players to challenge the big ASX bank share's market share without needing a large national branch network. Just think of how quickly Macquarie Group Ltd (ASX: MQG) has become a sizeable player in the banking space.
Within the VAS ETF are numerous businesses delivering strong compound revenue growth every year such as Xero Limited (ASX: XRO), WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU) and Johns Lyng Group Ltd (ASX: JLG).
Over five years, I think growing businesses are going to deliver a stronger total return than CBA shares as they build up their profit.
The VAS ETF is better value
Vanguard tells investors about what valuation the ETF is trading at every month to give investors a sense of it.
At the end of June 2023, the Vanguard Australian Shares Index ETF had a price/earnings (P/E) ratio of 12.8 times according to Vanguard.
Using the estimates on Commsec, CBA shares are trading at 18 times FY23's estimated earnings and close to 19 times FY24's estimated earnings.
The VAS ETF seems, to me, to be significantly cheaper in terms of the earnings valuation.
