The Vanguard Diversified High Growth Index ETF (ASX: VDHG) is a highly diversified exchange-traded fund (ETF), which some people may consider an excellent one-size-fits-all investment option.
We often talk about diversification being an important element of ensuring our portfolios are not too concentrated in one business or sector. Ideally, most of our investments have different downside risks.
The VDHG tries to provide both diversification and exposure to growth assets. If the underlying portfolio can provide everything we need, wouldn't that make things simple?
Let's examine this idea further by analysing the positives of this fund.
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Appealing elements
It's a good idea to have exposure to a mix of different assets.
The VDHG ETF is invested in several funds, giving investors exposure to those investment markets and their underlying diversification.
It aims to have the following target allocations:
- ASX shares (36%)
- International shares (26.5%)
- International shares (hedged) (16%)
- Small international companies (6.5%)
- Emerging market shares (5%)
- Global bonds (7%)
- Australian bonds (3%)
There's a very healthy allocation to non-ASX shares, which exposes the portfolio to hundreds of businesses worldwide.
While bonds are not a high-growth asset, a small allocation can provide some protection against volatility while also unlocking a decent passive income yield for that portion of the portfolio.
Considering the strong level of diversification, it has very reasonable management fees in my opinion. The cost is just 0.27% per annum.
Should it be the only investment?
For investors wanting an all-in-one fund, then this certainly can tick the box. However, there's more to being a good investment than just diversification.
We want to generate good returns; that's largely what investing is about – growing our money.
According to Vanguard, the VDHG has returned an average of 6.1% over the past three years and 8.7% per annum since its inception in November 2017.
Some investors may not prefer to have a bond allocation; bonds have a limited upside and can also go down in value, as we saw during the interest rate hiking period during FY23.
Investors may prefer an all-share diversified option such as BetaShares Diversified All Growth ETF (ASX: DHHF), which has returned an average of 7.76% per annum over the last three years – a stronger return than the VDHG ETF.
Investors may even prefer to have a globally diversified ETF, such as Vanguard MSCI Index International Shares ETF (ASX: VGS), that only invests in the larger and strongest global businesses. This fund is still invested in over 1,000 businesses, but it has returned an average of 11.25% per annum over the prior three years.
Another thing to keep in mind is that if someone's entire portfolio were allocated to the VDHG ETF, Vanguard would be in charge of all our money. Vanguard is a wonderful institution, but it's worth asking the question of whether we would want 100% of our capital in one place.
I think the VDHG ETF is a solid choice and could work for people wanting a simple option. However, over the long term, investors may do better by owning share-only ETFs like the VGS ETF.
