Should the Vanguard Australian Shares Index ETF (VAS) be the first choice for your superannuation fund?

Can this Vanguard ETF provide what retirees are after?

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The Vanguard Australian Shares Index ETF (ASX: VAS) is a popular choice for investors, as it gives exposer to numerous ASX blue-chip shares. Some investors may be wondering if it's a good option for their superannuation fund.

Investors are capable of building their own portfolio of ASX shares, but there may be an attraction for investors who want to buy a readymade portfolio that tracks the S&P/ASX 300 Index (ASX: XKO).

Many people may already invest in ASX shares via an industry superannuation fund (such as AustralianSuper, Australian retirement Trust, REST, and Hostplus) with the Australian shares option, which is likely investing in similar businesses as the VAS ETF.

It may not be easy to invest in the VAS ETF in an industry superannuation fund, so I'll look at the fund from the perspective of a retiree.

Decent dividend yield

The dividend yield of the VAS ETF is rather high compared to most of the international exchange-traded funds (ETFs). An ETF's yield is influenced by the yield of the underlying holdings.

The ASX 300 is weighted towards higher-yield stocks like BHP Group Ltd (ASX: BHP) and Westpac Banking Corp (ASX: WBC), so this helps the overall yield of the VAS ETF.

According to Vanguard, the VAS ETF has a dividend yield of 3.7%. The bonus of franking credits boosts the grossed-up dividend yield close to 5%.

That's a very good yield, in my opinion, considering the adequate level of diversification that the fund can provide. It does have a large weighting to ASX bank shares and ASX mining shares, but the fund's dividend yield wouldn't be as high if other industries had bigger allocations within the portfolio.

For investors just focused on the passive income, I believe VAS ETF is a solid option for a superannuation fund, though there are ASX dividend shares out there which have higher yields.

Total returns

For me, what the Vanguard Australian Shares Index ETF lacks is good capital growth potential. The VAS ETF unit price is almost exactly where it was three years ago.

Indeed, in the ten years to April 2024, the fund only saw capital growth of an average of 3.2% per annum with total returns of 7.7% per annum. Large banks and miners aren't known for consistently strong earnings growth, nor are they retaining much profit each year to unlock more growth.

If investors are looking for decent dividends and a small amount of capital growth over time, then the VAS ETF seems to tick that box.

However, there could be an opportunity cost of missing out on other, better-performing investments.

For starters, the Vanguard MSCI Index International Shares ETF (ASX: VGS) could be a good place to allocate funds. It tracks the global share market and owns names like Microsoft, Apple, Nvidia, and Alphabet (Google).

Since its inception in November 2014, the VGS ETF has delivered an average annual return of 12.7%, thanks to a significant majority of the returns being capital growth. Of course, past performance is not a reliable indicator of future performance.

With a theoretical annual return of, say, 12% per annum, investors would be able to sell 5% of the fund's value (creating a 5% 'yield'), and it would see capital growth of 7%.

While I'd be comfortable owning some VAS ETF units in my superannuation fund, I'd choose to invest most of my money in assets that have a better chance of delivering greater returns, like globally focused ETFs.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. 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 Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Apple, Microsoft, Nvidia, and Vanguard Msci Index International Shares ETF. 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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