The Vanguard Australian Shares Index ETF (ASX: VAS) is Australia's most popular exchange-traded fund (ETF), with a size of $15.3 billion as of 30 June 2024. But being the most popular doesn't necessarily mean it ticks every box as the best ETF to invest in.
The VAS ETF is certainly a good choice for investors who want a cheap management fee at just 0.07% per annum.
And when it comes to the number of different shares owned, the Vanguard Australian Shares Index ETF seems impressive, with 300 holdings.
However, it may not be as diversified as it appears.
Portfolio concentration
According to Vanguard, only two sectors account for more than 50% of the overall portfolio. At June 2024, ASX financial shares comprised 31.1% of the portfolio and ASX mining shares were 20.8%.
Not only is it concentrated on just two sectors, but the biggest businesses account for a lot of the portfolio.
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), Wesfarmers Ltd (ASX: WES) and Macquarie Group Ltd (ASX: MQG) account for 42.3%. That's just eight ASX shares accounting for more than 40% of the portfolio.
There's nothing particularly wrong with that, but if investors are buying Vanguard Australian Shares Index ETF with diversification as the number one criterion, there could be a better option.
VanEck Australian Equal Weight ETF (ASX: MVW)
An alternative to consider for ASX diversification is the MVW ETF. Instead of deciding its allocation on the market capitalisation size of each business, this fund is equally weighted between its 74 holdings.
It's rebalanced quarterly to ensure that the positions stay equally weighted.
To be included in the index, a company's market cap needs to exceed US$150 million, the three-month average daily trading volume must be at least US$1 million, and the number of securities traded per month must be at least 250,000.
At the moment, the fund's three biggest positions are Steadfast Group Ltd (ASX: SDF), Aristocrat Leisure Limited (ASX: ALL) and CSL. The smallest positions are currently IGO Ltd (ASX: IGO), Pilbara Minerals Ltd (ASX: PLS) and Mineral Resources Ltd (ASX: MIN). However, the only reason there are larger and smaller positions is just the recent performance. They'll be equal-weighted again soon enough. The biggest weighting is 1.54%, and the smallest is 1.16%.
The MVW ETF has returned an average of 9.1% per annum over the past 10 years, while the VAS ETF has returned an average of 8% over the past 10 years.
As MVW ETF is weighted more toward smaller businesses, which can have greater return potential, I think the MVW ETF could outperform the Vanguard Australian Shares Index ETF.
