The Vanguard Australian Shares Index ETF (ASX: VAS) is an exchange-traded fund (ETF) that focuses on the S&P/ASX 300 Index (ASX: XKO), representing 300 of the biggest businesses on the ASX. Can the VAS ETF, the biggest ETF in terms of fund size, be a good option for ASX growth investors?
There are two main ways for investors to make investment returns: dividends and capital growth.
Some companies don't pay any dividends at all, so any returns from those businesses need to come from share price increases. Names like Xero Limited (ASX: XRO), Berkshire Hathaway, Alphabet, Amazon.com come to mind.
A company can see its share price rise over time and deliver dividends, such as Sonic Healthcare Ltd (ASX: SHL), Altium Limited (ASX: ALU) and Brickworks Limited (ASX: BKW).
Can Vanguard Australian Shares Index ETF (VAS) fit the bill for ASX growth share investors?
The performance of the VAS ETF simply tracks the performance of its underlying holdings. The bigger the allocation to a holding, the more influence it has over the VAS ETF's performance.
Looking at the biggest positions in the portfolio, these are the ones with a weighting of more than 3% as of 31 December 2023:
- BHP Group Ltd (ASX: BHP) – 11%
- Commonwealth Bank of Australia (ASX: CBA) – 8.1%
- CSL Ltd (ASX: CSL) – 6%
- National Australia Bank Ltd (ASX: NAB) – 4.1%
- Westpac Banking Corp (ASX: WBC) – 3.5%
- ANZ Group Holdings Ltd (ASX: ANZ) – 3.5%
As we can see, mining and banking are two key sectors for the ASX.
The tricky thing is that they're such huge businesses in market capitalisation terms that it becomes very difficult to keep delivering growth. It's much easier to double a $1 billion business to $2 billion than it is to go from $100 billion to $200 billion.
The big four ASX bank shares have a huge market share, and I'm not sure they can grow profit at a solid compounding rate from here, considering there is so much competition in the lending space willing to accept very low returns. However, they continue to pay big dividends.
BHP (and other ASX mining shares) in the VAS ETF are highly reliant on good commodity prices to make good profit. Commodity prices don't keep increasing year after year – they usually go through cycles. Miners can increase their production, but it's unsustainable to think the resource business can keep producing more and more. If production does keep rising, it could hurt the commodity price.
My point is that the ASX is full of the sorts of companies that aren't likely to see strong profit growth year after year. Investors usually judge a business based on how much profit it's making, so the share price isn't likely to rise strongly if the profit isn't rising.
There are some businesses within the VAS ETF that are doing better at growing profit, such as CSL, Aristocrat Leisure Limited (ASX: ALL) and WiseTech Global Ltd (ASX: WTC). But, they don't have as much influence on the VAS ETF as BHP and the ASX bank shares.
Past performance
ASX growth share investors need to know that while the VAS ETF has delivered an average return per annum of around 10% over the past five years, its capital growth has been 5.6% per annum. In the past decade, the total return has been an average per annum of 7.8%, which included capital growth of 3.3% per annum.
I think the VAS ETF can keep increasing value, but it's not going to shoot the lights out when it comes to capital growth. I'd rather go for an ASX ETF that's focused on the global share market, such as Vanguard MSCI Index International Shares ETF (ASX: VGS).
