The Vanguard Australian Shares Index ETF (ASX: VAS) is an exchange-traded fund (ETF) that boasts a huge amount of investor money — around $13 billion. In this article, I'm going to look at whether investing in this fund is a good option for beginner investors.
An ETF offers investors a way of buying a group of shares in a single investment, so it's very handy for adding instant diversification to your portfolio. Some ETFs focus on a sector, like cybersecurity or video gaming, while others are based on a local or global share market.
The VAS ETF is based on the S&P/ASX 300 Index (ASX: XKO), which comprises 300 of the largest companies listed on the ASX.
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Why Vanguard Australian Shares Index ETF is a good option for beginners
The ETF provider is Vanguard, one of the world's largest asset managers. The owners of Vanguard are the investors themselves, and it shares the profit with investors/us by lowering the management fees of the investments.
The VAS ETF has one of the lowest management fees of any fund in Australia, with an annual cost of just 0.07%. That's very close to 0%, and means investors get to keep nearly all of the funds in their investment account.
It's invested in all of the blue chips that you may recognise, such as BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Macquarie Group Ltd (ASX: MQG) and Woolworths Group Ltd (ASX: WOW).
For investors seeking dividend income, it's a decent option. An ETF simply passes on to investors the income received from its holdings. According to Vanguard, the current (partially franked) dividend yield was 4.4% for the VAS ETF.
Past performance is not a guarantee of what the future returns will be, but since the ETF started in May 2009, it has delivered a return of an average of 8.8% per annum.
Should it be a beginner's first choice?
There are a number of things to like about this ETF, but there are a few reasons why beginners may be better served by choosing something else.
A sizeable portion of the returns of the VAS ETF comes in the form of dividends, as I've mentioned. I'm guessing that a lot of beginner investors are also working, meaning that they're in a tax bracket where a decent portion of returns would be lost to tax each year. The higher the tax bracket, the more of the returns that would be lost.
I'd suggest that there are other ETFs that can deliver more capital growth, and less of the return comes from dividends. Capital returns are essentially only taxed when the investment is sold.
As an example, the Vanguard MSCI Index International Shares ETF (ASX: VGS) is invested in the global share market, and its biggest positions are names like Microsoft, Apple, Amazon.com, Alphabet, Meta Platforms and so on. Since the VGS ETF started in November 2014, its average return per annum has been 12.3%. So, not only has the gross return been higher, but less has been lost on the income return to tax as well.
The other negative I'd say about the Vanguard Australian Shares Index ETF is that while it is invested in 300 ASX shares, more than half of the portfolio comprises financial and mining shares – that's not great diversification, and banks and miners are not exactly known for delivering a lot of capital growth.
So, in summary, I think the VAS ETF is a solid option, but other choices could be even better for beginners over the long term.
