The Vanguard Diversified High Growth Index ETF (ASX: VDHG) is a popular exchange-traded fund (ETF) for the diversification that it offers. Is it the only investment we need?
Vanguard is one of the world leaders at providing extremely low-cost investment options. The owners of Vanguard are the investors themselves – it shares the profit by making the investment funds as cheap as possible.
While Vanguard offers numerous index funds, the VDHG ETF is a bit different. It's invested across a number of funds, with a preference for growth-focused assets (shares) over defensive assets (bonds). There are a number of reasons to like it.
Extremely diversified
The VDHG ETF is invested across seven different funds. At the end of January 2023, these were the weightings for the growth funds:
Vanguard Australian Shares Index Fund (wholesale) (36.3%)
Vanguard International Shares Index Fund (wholesale) (26.6%)
Vanguard International Shares Index Fund (hedged) – AUD class (16.1%)
Vanguard International Small Companies Index Fund (wholesale) (6.4%)
Vanguard Emerging Markets Shares Index Fund (wholesale) (4.6%)
It's also invested in two bond funds, those allocations are:
Vanguard Global Aggregate Bond Index Fund (hedged) (7%)
Vanguard Australian Fixed Interest Index Fund (wholesale) (3%)
If we were to look at all of the underlying businesses that the VDHG ETF is invested in, it would be a four-figure number, meaning in the thousands. That's excellent diversification.
The addition of the bonds can provide the portfolio with some stability during global share market volatility.
Low fees
The VDHG ETF has very low costs considering how diversified it is. The lower the costs, the more the investment returns stay with the investor. This investment option has an annual fee of 0.27%.
Active fund managers typically charge at least 1% and sometimes outperformance fees as well. Fees can make a difference to our wealth to the tune of tens of thousands of dollars over 30 or 40 years.
Decent returns
Over the five years to January 2024, the VDHG ETF has made an average return per annum of 9.6%.
If someone invested $1,000, it would double to more than $2,000 in around eight years growing at that rate.
Of course, past performance is not a reliable indicator of future returns. The VDHG ETF could deliver better returns in the next five years (or it could do worse).
I think investing in shares gives it a good chance of returns over the long term, though that can come with more volatility.
Why I wouldn't make it my only investment
I like the concept of the VDHG ETF, and it can make things very simple for some investors.
However, if I'm going to invest in an ETF for the purpose of gaining exposure to shares, it may as well have 100% exposure to shares. In my mind, the bond returns are likely to drag on the VDHG ETF's return because they lack the potential to deliver strong capital growth.
It also has a very large allocation to the ASX share market, when the ASX only accounts for 2% of the global share market. I'd prefer a bigger allocation to global winners like Microsoft and Alphabet than what the VDHG ETF provides. I like Vanguard MSCI Index International Shares ETF (ASX: VGS), as an example that's purely about shares.
