Investors have watched the seemingly unstoppable ascent of Commonwealth Bank of Australia (ASX: CBA) shares over the past 18 months or so with a likely mixture of pleasure, vindication, bewilderment, and horror. But today, let's discuss what it could mean for the Vanguard Australian Shares Index ETF (ASX: VAS).
Of the emotions listed above, the former two are most likely associated with the army of investors who have owned CBA stock for decades. For these investors, owning the ASX's largest bank share has brought nothing but wealth. And that has come in both capital returns and dividend payments.
The latter two emotions are more likely reserved for those investors who have been watching CBA from the sidelines.
I don't own CBA shares myself, and (probably as a consequence), fall into the second camp. However, I do own the Vanguard Australian Shares ETF. In fact, this index fund forms a core pillar of my portfolio.
But it also means I am indirectly exposed to CBA. Even though I don't own the stock.
That's because, although the VAS exchange-traded fund (ETF) tracks a portfolio of 300 individual ASX shares, it is heavily weighted towards the largest companies on our stock market.
Image source: Getty Images
CBA dominates the Vanguard Australian Shares ETF portfolio
A few years ago, CBA shares made up 7% or 8% of VAS' portfolio. However, with the bank gaining a massive 80% or so since just October of 2023, its presence in VAS' portfolio now stands at an unprecedented 11.25%.
That means that for every $100 an investor puts into the Vanguard Australian Shares ETF today, approximately $11.25 will end up invested in CBA stock.
The other $88.75 or so will then be spread out amongst the remaining 299 shares on the S&P/ASX 300 Index (ASX: XKO).
That should give you some idea of just how influential CBA shares are to the entire Australian stock market.
So that brings us to an important question: Should investors who are worried about the sky-high valuation of Commonwealth Bank stock buy the Vanguard Australian Shares ETF today?
Should ASX investors buy VAS today?
I would argue that long-term investors shouldn't hold back on buying the Vanguard Australian Shares ETF today. Even though CBA stock is at an elevated level.
Index funds like VAS are designed to add to winners and weed out losers over time. CBA has reached its current position in this ASX index fund because of its share price ascent. Sure, it may come back down to earth. But if it does, other stocks, perhaps those performing better, will take its place.
If you have a long time horizon for your investments, CBA's strength shouldn't bother you. Especially if you employ a dollar-cost averaging strategy for investing in the Vanguard Australian Shares ETF. As such, I think buying VAS units today is a far better choice than buying individual CBA shares if you have money to spend.
