This compelling ASX ETF may be a better way to invest in Aussie stocks than Vanguard Australian Shares Index ETF (VAS)

This ASX ETF could be an even more effective investment than Vanguard's.

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The Vanguard Australian Shares Index ETF (ASX: VAS) is an attractive exchange-traded fund (ETF) to own for investors who want exposure to Australia's biggest companies.

But I'm going to tell you about VanEck Australian Equal Weight ETF (ASX: MVW) and explain why it might be an even better choice.

The VAS ETF seeks to track the S&P/ASX 300 Index (ASX: XKO), which includes 300 of the largest businesses on the ASX. It has a very low annual management fee of 0.07%, satisfactory diversification, and a large weighting to names like BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA), and CSL Ltd (ASX: CSL).

I'll discuss three factors that make me like the equal-weight ETF even more than the VAS option.

Even allocation between companies

There may be 300 businesses inside the VAS ETF, but the biggest 10 positions account for almost half of the portfolio. That's not necessarily a bad thing, but it does mean it's not as diversified as it could be.

The top 10 include National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), Wesfarmers Ltd (ASX: WES), Macquarie Group Ltd (ASX: MQG), Woodside Energy Group Ltd (ASX: WDS) and Goodman Group (ASX: GMG).

In contrast, the MVW ETF only has 76 holdings at the moment, but all weightings are virtually the same. Share price movements change the positioning slightly, but the biggest allocations of Evolution Mining Ltd (ASX: EVN), Qantas Airways Ltd (ASX: QAN), and South32 Ltd (ASX: S32) have a weighting of 1.6%, 1.5%, and 1.48%, respectively. The ETF is regularly re-weighted to achieve equal position sizes.

Higher weighting to growth industries

At the end of February 2024, the Vanguard Australian Shares Index ETF had a large weighting to ASX financial shares (29.7%) and mining shares (22.4%). Those two sectors make up just over half of the portfolio, but they don't have a strong earnings growth profile.

Over the long term, I think sectors like healthcare, tech , consumer discretionary and industrial shares have a more appealing growth outlook.

Within the MVW ETF, the financial sector only makes up 19.6% of the portfolio and mining comprises 18.3% of the portfolio. This is only 37.9% of the portfolio combined and means there's more room for other industries, which may help deliver better shareholder returns

Stronger returns achieved

Looking at the returns that the MVW ETF has achieved, its net returns have been an average of 9.99% over the past three years, 8.97% per annum over the last five years and 9.63% in the past decade.

The VAS ETF has delivered an average return per annum of 9.1% in the last three years, 8.6% per annum in the past five years, and 7.9% in the past ten years. The Vanguard Australian Shares Index ETF has underperformed over each time period.

Past performance is definitely not a guarantee of future performance, but it shows how some smaller businesses can deliver stronger returns than the ASX large-cap shares over the long term. I think they can continue the trend of better growth over the long term, but there may certainly be volatility along the way.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Goodman Group, Macquarie Group, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Macquarie Group and Wesfarmers. The Motley Fool Australia has recommended CSL and Goodman Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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