The Vanguard Australian Shares Index ETF (ASX: VAS) is a popular way for Aussies to invest on the ASX. In this article, I'm going to look at whether the exchange-traded fund (ETF) could be an effective investment for retirees.
Retirement can be a tricky phase of our financial lives. Most people have stopped working to earn money, but the nest egg is meant to last a long, unknown amount of time.
It's possible that the VAS ETF could do what investors need, though it'd be a good idea for retirees to utilise a good financial planner to help tailor a specific plan to ensure a good setup in retirement.
Firstly, I'll briefly cover what the Vanguard Australian Shares Index ETF actually is.
What does the VAS ETF do?
An ETF allows investors to buy a group of businesses (or other assets) in a single investment. The job of the Vanguard Australian Shares Index ETF is to track the S&P/ASX 300 Index (ASX: XKO), which is a group of 300 of the largest businesses on the ASX.
It does this for a very low annual management fee of 0.07%, which is one of the lowest on the ASX. That fee comes out of the fund value – investors don't directly pay that from their bank account or their retirement fund's account.
The biggest businesses get the largest allocations in the portfolio. At the end of August 2023, the top 10 holdings were:
- BHP Group Ltd (ASX: BHP)
- Commonwealth Bank of Australia (ASX: CBA)
- CSL Ltd (ASX: CSL)
- National Australia Bank Ltd (ASX: NAB)
- Westpac Banking Corp (ASX: WBC)
- ANZ Group Holdings Ltd (ASX: ANZ)
- Woodside Energy Group Ltd (ASX: WDS)
- Macquarie Group Ltd (ASX: MQG)
- Wesfarmers Ltd (ASX: WES)
- Woolworths Group Ltd (ASX: WOW)
Is it a good option for retirement?
I imagine a lot of retirees are looking for passive income from their retirement investments.
The VAS ETF is heavily invested in sectors (ASX financial shares and ASX mining shares) that have a reputation for paying elevated dividend yields due to their relatively low price/earnings (P/E) ratios and fairly generous dividend payout ratios.
According to Vanguard, the provider of the ETF, the fund has a dividend yield of 4.4%. That doesn't include the benefit of franking credits either, which would take the grossed-up yield to over 5%. An ETF simply passes through the dividends it receives to investors.
The VAS ETF probably isn't going to shoot the lights out in capital growth terms because of the size of the banks and miners, and how those sectors typically grow earnings at a fairly slow rate over the long term compared to ASX tech shares. Over the past decade, the Vanguard Australian Shares Index ETF has delivered capital growth of an average of 3.3%.
But, it offers investors the ability to get quite a lot of diversification with just one investment. Plus, investors don't need to worry about when to buy and sell stocks – they can just own the VAS ETF passively and watch the dividends roll in each year.
I think it can work for retirees in retirement, though there are other investments that could be even more effective.
