Two of the most popular ASX exchange-traded funds (ETFs) on the market today are Vanguard Australian Shares Index ETF (ASX: VAS) and Vanguard Australian Shares High Yield ETF (ASX: VHY).
In an article, Jamie Nemtsas, founder of retirement wealthy advisory, Wattle Partners, explains which ASX ETF he likes better for clients in retirement.
The result may surprise you.
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What are VAS and VHY ETFs?
Firstly, let's go over the differences between VAS ETF and VHY ETF.
VAS ETF
VAS provides easy exposure in a single trade to the top 300 companies by market cap on the ASX.
The ETF seeks to mirror the returns of the S&P/ASX 300 Index (ASX: XKO), before fees.
ASX VAS is the most popular ETF on the market, with $25.7 billion in funds under management (FUM).
VHY ETF
VHY ETF is full of ASX dividend shares that have higher forecast dividend yields than their peers.
This ETF tracks the FTSE Australia High Dividend Yield Index, before fees.
VHY ETF has a few rules: It doesn't invest more than 40% of funds in any one industry, nor more than 10% in any one stock.
VHY holds 73 shares across all sectors bar real estate investment trusts (REITs), and has $7.67 billion in FUM.
Both ASX ETFs pay distributions (dividends) quarterly.
VAS vs. VHY ETF in retirement
Nemtsas reviewed the 15-year performance of the VAS and VHY ETFs to decide which one he felt was the better pick for retirement.
His answer: VAS.
Nemtsas said:
While a high-dividend ETF looks tempting for retirement income, the hidden structural trade-offs can derail long-term wealth.
Nemtsas gives five reasons as to why he prefers VAS ETF for retirement.
1. Portfolio diversification
VAS holds about 300 shares while VHY holds 73.
This means VHY's portfolio is more concentrated in the banks and miners through their weightings.
The result, according to Nemtsas:
When BHP Group Ltd (ASX: BHP) halves the dividend, as it has twice in the last decade, VHY feels it harder.
When the banks compress payout ratios under APRA pressure, VHY feels that harder too.
2. Management fees
VAS charges an annual management fee of 0.07% while VHY charges 0.25%.
The 18 basis point difference compounds. On a $500,000 holding, that is $900 a year.
Over 20 years of retirement, with reinvestment, that is closer to $35,000. Fees are the one input you can guarantee. Yield is not.
3. Fund turnover and capital gains tax (CGT)
Nemtsas says VAS turns over less than 5% of its portfolio per year, while VHY turns over closer to 37% because it chases yield.
The result is capital gains tax events inside the fund, distributed back to unit holders in non-cash form at the end of the year.
Retirees in pension phase wear less of this, but the structural inefficiency is real and persistent.
4. Total return vs. headline dividend yield
Nemtsas says VAS has produced a higher average total return of 8% than VHY at 6.8% over the past 10 years.
He says:
That is the cost of buying yield by ignoring price.
The names with the highest forecast yield are typically the names the market is least optimistic about.
Sometimes the market is wrong. Often it is not.
5. VHY ETF's higher yield is not free
Nemtsas explains:
VHY's 6% versus VAS's 3.6% comes from two places.
First, higher payout ratios in the names VHY overweights.
Second, the screening methodology itself, which mechanically tilts toward stocks where the dividend is high relative to a depressed share price.
Both effects can persist for years. Both also reverse.
The franking benefit in VHY is real, but VAS picks up plenty of franking through its Commonwealth Bank of Australia (ASX: CBA), BHP, Macquarie Group Ltd (ASX: MQG) and Wesfarmers Ltd (ASX: WES) exposure too.
The franking gap is narrower than the headline yield gap suggests.
