VAS provides exposure to the largest 300 Australian businesses in one simple product. It has proven the ability to outperform 81.70% of active strategies. I am bullish on VAS and own a large amount in our portfolio, which has made me excellent capital gains and pays massive distributions every quarter. Should I buy VAS ETF?
Should I Buy VAS ETF: Pros and Cons
- Low-Cost Fees
- Diversification across the ASX 300
- Vanguard well-established fund
- Full use of highly franked distributions
- No currency risks
- Australian Domiciled
- DRIP opportunities
- Cheaper Management Fees available
- Home Bias
- Overseas markets have historically greater returns
- Equities Only* (Can be seen as a positive)
- Massive allocation to Banks and Materials
- Low exposure to emerging shares
Who Should Buy VAS Shares
VAS is used by many investors to gain exposure to a broad basket of Australia’s biggest public companies in an efficient manner. It can be suitable for beginners and advanced investors to add equity diversification to a portfolio. The fund may be used by itself or in conjunction with other funds depending on your portfolio goals. Here are some popular ideas of how it can be used in a portfolio: Creating The Ultimate ETF Portfolio
Vanguard recommends it for:
Buy and hold investors seeking long-term capital growth, some tax-effective income, and a higher tolerance for the risks associated with share market volatility. With a minimum suggested investment timeframe of seven years.
Should I Buy VAS ETF: Facts
|Benchmark||S&P/ASX 300 Index|
|Number of Holdings||307|
|Assets Under Management||$8.5B|
|Inception Date||4th May 2009|
|Distribution Reinvestment Plan||Yes|
|Total 10-Year Returns||8.64% p.a|
About VAS ETF ASX
The Vanguard Australian Shares Index ETF or VAS is the largest ETF by FUM in Australia. The ETF has $8.6 billion in funds under management or the total fund amount of $24.73 Billion. VAS provides low-cost, broadly diversified exposure to Australian companies and property trusts listed on the Australian Securities Exchange. It also offers potential long-term capital growth along with dividend income and franking credits.
The ETF is a passive index fund tracking the S&P/ASX 300 Index. The Fund invests in a diversified portfolio of securities, which means the Fund is less exposed to the performance fluctuations of individual securities. The fund takes a passive investing approach, which has been shown to outperform Active investing. S&P concludes that 81.70% of active funds will underperform the index over a five-year period.
VAS is used by many Australian investors to gain exposure to a broad basket of Australia’s biggest public companies in an efficient manner.
VAS Share registry: Computershare. Through Computershare, you can manage your holdings and communications, and also select whether or not to reinvest distributions.
VAS is domiciled in Australia meaning it is a registered fund in Australia for tax purposes. Investors who buy into this ETF, and are Australian residents for tax purposes, will be subject to Australian taxes and regulation.
Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses, and tax. Source: Vanguard
The Benchmark Index
VAS is benchmarked against the S&P/ASX 300 (ASX: XKO). The index is market-capitalization weighted, meaning each company included is in proportion to the index’s total market value, and float-adjusted, meaning that the index only counts those shares that are available to investors and excludes closely-held shares or shares held by governments or other companies, Source: S&P.
The index was created by Standards and Poors (S&P) in April 2000.
“The index measures the performance of 300 of the largest, highly liquid securities listed on the ASX by float-adjusted market capitalization. The index includes the LargeCap, MidCap, and SmallCap components of the S&P/ASX index family”Standards & Poors
The fund owns the top 300 ASX shares by market capitalization. The holdings are reviewed semi-annually by S&P in March and September. This document details the exact definitions and management of the index.
S&P 300 Geographic Allocation
|Country||Number of Constituents||Index Weight (%)||Total Market Capitalization (AUD Mil)|
ASX VAS Holdings
Due to the nature of the Australian economy, VAS is heavily weighted towards Banks and materials. We can see in the graph below that Financial Services account for 29.25% of holdings and Materials a further 19.95%. That’s 49.2% combined. In our top 10 holdings, all of the big four banks are listed, these four companies account for 20.36% of all holdings.
Although VAS is highly diversified amongst Australian companies it is heavily weighted to Banks and materials. Meanwhile, technology businesses are very under-represented account for only 4.41% of holdings.
Top 10 holdings
- Commonwealth Bank of Australia (7.67%)
- BHP Group Ltd. (6.82%)
- CSL Ltd. (5.99%)
- Westpac Banking Corp. (4.45%)
- National Australia Bank Ltd. (4.27%)
- Australia & New Zealand Banking Group Ltd. (3.97%)
- Wesfarmers Ltd. (2.98%)
- Woolworths Group Ltd. (2.65%)
- Macquarie Group Ltd. (2.41%)
- Rio Tinto. (2.18%)
The top 10 holdings represent 44.3% of the total ETF. Here’s the full list of current holdings.
VAS Morningstar Sector Weightings:
VAS Shares Fees
- Management Fee: 0.10% p.a
- Indirect Costs: 0%
- Bid/Ask Spread: 0.02%
How are Management Fees Paid?
Management fees are automatically deducted from the fund’s Net Asset Value on a daily basis. This means is you as an investor never have to directly send money to Vanguard. It is all processed by the fund as they deduct the fees from the underlying earnings/capital of the fund. Because of this you never really notice the fees, instead, it just reduces the fund’s performance over time. When the fund sends out their AMMA statement at tax time you can see the full details of this.
The bid-ask spread is the difference in price between the highest price that a buyer is willing to pay for a security and the lowest price for which a seller is willing to sell it.
- The narrower the spread the better, as this reduces the trading costs associated with buying and selling ETFs
- Exchange-based spreads, as on the ASX, are set by the competitive tensions between market markers
- Larger Funds (like VAS) will tend to have lower bid-ask spreads.
- Bid-Ask spreads are not set but constantly change throughout the day, depending on supply and demand.
|Average Bid/Ask Spread||0.02%||0.07%||0.05%||0.04%|
In this table, we break down the total fees for the four popular ASX Index options. The total fees account for Management fees, indirect fees, and the average bid/ask spread. It is important to note, the bid-ask spread is constantly changing so this is based on averages only.
When we compare the total fees of these funds over the course of twenty years we see the differences are minor. VAS performed the best with total fees of $1,967 compares to STW with fees of $2,774 (a difference of $807).
*This data is based on the current total fees of each fund, a starting balance of $10k, and VAS past performance of 8.64% pa.
VAS ETF Share Price: Performance
In the below table we set out the returns of VAS compared to the S&P/ASX 300 Index over various time frames. From this data, we can see the fund does an excellent job at replicating the benchmark.
We have also compared the performance of VAS to several other popular ETFs. They are expressed as average returns per annum.
|Month||YTD||1 year||3 years||5 years||10 years||Inception|
The below performance graph by Vanguard demonstrated the cumulative total returns of VAS over varying periods. We can see that the total investor returns over the course of 10-years are 129.13% and 202.15% since its inception in 2009.
Should I Buy VAS ETF: Characteristics
In this data, we can see the average fundamental factors across the VAS holdings. We can see the average PE ratio is 21.9x, the price to book is 2.3x and the ROE is 11.2%.
|Return on Equity||11.2%||11.2%|
|Earnings Growth Rate||4.6%||4.6%|
|Earnings Yield (dividend)||2.7%||2.7%|
In the below graph we see the average PE range of all ordinaries since 1980. This data can be extrapolated to VAS. We can see the average range is 15-20. In the past year, we see a massive spike in the average PE ratio. This is due to the COVID recession which saw company profits plummet as prices have since recovered. In future earnings seasons as we see profits return this PE ratio will return to the average.
Should I Buy VAS: Competitors
|Benchmark||S&P/ASX 300 Index||Solactive Australia 200 Index||S&P/ASX 200 Index||S&P/ASX 200 Index|
|Number of Holdings||307||201||204||201|
|Assets Under Management||$8.5B||$1.4B||$3.8B||$4.7B|
|Inception Date||4th May 2009||7th May 2018||6th Dec 2010||24th Aug 2001|
|Distribution Reinvestment Plan||Yes||Yes||Yes||Yes|
|Total 10-Year Returns||8.64% p.a||N/A (9.64% average)||8.55%||8.12%|
The main competition for VAS in the Australian index space is Betashares Low-cost A200 which was established in 2018 and shook up space with its very low fees, we also have iShares IOZ, and SPDR’s STW. It’s important to note these competitors are actually tracking the top 200, rather than VAS which is indexed to the ASX 300.
The differences in weightings between the indices is minor, and performance is similar. We personally don’t see this factor alone as a reason to pick one fund over another.
From our comparison, we can see that VAS is by far the largest fund in terms of assets under management. They also historically have a low portfolio turnover, which can help minimize tax implications. Although in saying this all funds have a very low turnover. A200 is the cheapest of these funds, and it growing fast due to this competitive advantage.
At the current rates, VAS pays a distribution of $1.9786 or $2.6448 gross. This gives VAS a dividend yield of 2.10% and 2.81%. The distribution amount and yield are relatively low to the historical trends, this is due to the underlying equities reducing dividends during the COVID recessionary period. As profits return we will see this yield again increase to its old average and trend of over $4 per holding. The historical average yield for VAS is 4.41%.
Since VAS owns the top Australian companies it pays out highly franked distributions. The exact franking percentage fluctuates with each distribution since it is dependent on the underlying assets, however, the average amount is 75%.
VAS Distribution History (Previous two years)
|Distribution date||CPU||Ex-entitlement date||Record date||Payable date||Re-invest price|
|31 Mar 2021||76.996077||01 Apr 2021||06 Apr 2021||20 Apr 2021||$86.7333|
|31 Dec 2020||43.417096||04 Jan 2021||05 Jan 2021||19 Jan 2021||$84.0043|
|30 Sep 2020||56.841847||01 Oct 2020||02 Oct 2020||16 Oct 2020||$74.2070|
|30 Jun 2020||20.602331||01 Jul 2020||02 Jul 2020||16 Jul 2020||$74.8244|
|31 Mar 2020||67.265646||01 Apr 2020||02 Apr 2020||20 Apr 2020||$64.1653|
|31 Dec 2019||72.136857||02 Jan 2020||03 Jan 2020||17 Jan 2020||$84.6318|
|30 Sep 2019||107.095678||01 Oct 2019||02 Oct 2019||16 Oct 2019||$84.7655|
|30 Jun 2019||82.136181||01 Jul 2019||02 Jul 2019||16 Jul 2019||$83.7151|
|31 Mar 2019||91.593339||01 Apr 2019||02 Apr 2019||16 Apr 2019||$78.2766|
As an ETF is a trust structure the fund will payout all its earnings after expenses to investors.
When does VAS pay dividends? Historically VAS pays distributions quarterly (4 times a year). The Ex-Date of the distributions is usually the first day of trading in January, April, July, and October (Every three months).
The distributions are normally be paid within 20 business days following the end of the distribution period. VAS investors are eligible to participate in a Distribution Reinvestment Plan (DRIP), which can be set up through the share registry, Computershare.
Should I Buy VAS ETF: Retail Fund VS ETF
The Vanguard Australian Shares Fund can also be purchased as a retail fund. This means instead of simply buying and selling the fund on an exchange like an Exchange Traded Fund (ETF), you instead buy the fund directly through Vanguard. As a result, no brokerage is paid in trading. However, the retail fund is slightly more expensive with fees of 0.16% pa.
Either option can be a great investment strategy and the differences are pretty minor between the retail fund or ETF option. The difference in annual fees for $10,000 over the course of a year is $6. Depending on your frequency of buying and selling will depend on which option will be cheaper in the long run. However, the differences will be very minor, and we consider them negligible in most cases.
Here’s how they compare:
|Capital||Retail||ETF||ETF 1 Trades pa||ETF 2 Trades pa||ETF 3 Trades pa||ETF 4 Trades pa|
In this chart, we have broken down the cost of owning the fund VS ETF at different prices and for how many times you plan on trading within a year. In this example, we have assumed a brokerage price of $10. I have underlined all instances in this example where the ETF is the cheaper option.
As we can see the ETF is obviously the cheaper option at higher capital amounts and with lower levels of trading. We can see the price differences are largely negligible.
SPIVA: S&P Indices Versus Active
SPIVA is a study conducted by Standard and Poor’s to determine the performance of Active Versus Passive Index Funds. This report is one of my favorite pieces of research available and largely one of the reasons that I hold a large portion of my capital in passive index funds, like VAS.
This report found 81.70% of actively managed funds fail to outperform the S&P/ASX 200 index.
“Actively managed funds have historically tended to underperform their benchmarks over short- and long-term periods. This has tended to hold true (with exceptions) across countries and regions. Another recurring theme is that even when a majority of actively managed funds in a category have outperformed the benchmark over one time period, they have usually failed to outperform over multiple periods.”Source: Standard and Poors
If all these professionally managed active funds fail to beat the proven method of a buy-and-hold passive strategy, how do you think your holdings will perform?
Should I Buy VAS ETF: Prophet’s Take
VAS provides efficient exposure to the largest 300 Australian shares in one simple easy product. Its low-cost, tax-efficient strategy is an excellent option for investors looking for exposure to the Australian markets.
Due to the nature of the Australian economy, there is a large reliance on the banking and material sector. These businesses account for over 49% of the capital allocation. There is also underexposure to technology companies. VAS does a perfect job of replicating the S&P/ASX 300 benchmark. However, this index may not be favorable for all investors.
In terms of competition, VAS is the largest Passive Australian Index fund. Their management fees are very competitive and their overall total fees are the cheapest. Although, in this space, all options are extremely cheap making fee differences mostly negligible.
The main difference is VAS offers exposure to the top 300 companies, whereas the alternatives hold the top 200. Again this is a minor difference, although it does feature exposure to some small/microcap companies.
I believe in the Australian economy and for this reason, I am very Bullish on VAS. The ability for it to outperform 81.70% of active strategies has sold me on adding a large allocation of VAS to my portfolio.
Please Remember all Articles Published on Prophet Invest are Opinion only
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