VDHG is a favorite within the FIRE community for being a low-cost highly diversified option that many use as their sole investment choice. I am bullish on VDHG, the fund has performed well with solid capital gains and distributions every quarter. But should you put all your eggs in one basket?
Should I buy VDHG ETF?
Should I Buy VDHG ETF: Pros And Cons
- Massive Diversification
- Exposure to International Assets
- Exposure to Emerging Markets
- Reasonably Priced
- Vanguard well-established fund
- Australian Domiciled
- DRIP Opportunities
- Large Tax Liabilities from distributions
- Large Australian Allocations
- Bonds and Fixed Income Assets* (Can be seen as a positive)
- Unknown Historic Returns
Who Should Buy VDHG Shares
VDHG is used by many investors to gain exposure to a broad basket of some of the world’s biggest public companies and fixed income assets in an efficient manner.
For this reason, it is extremely popular with the Passive ‘FIRE’ community.
It can be suitable for beginners and advanced investors to add instant 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
Should I Buy VDHG ETF: Facts
|Benchmark||High Growth Composite Index|
|Number of Holdings||7*|
|Assets Under Management||$1,127.1 million|
|Inception Date||20 November 2017|
|Distribution Reinvestment Plan||Yes|
|Total 3-Year Returns||11.36|
*The fund holds 7 direct holdings, these holdings are funds that hold thousands of securities.
VDHG ETF Price
About VDHG ETF ASX
The Vanguard Diversified High Growth Index ETF (VDHG) is a fan favorite amongst the FIRE community over at r/fiaustralia. The ETF has $1.127 billion in funds under management and a total fund size of $5.445 Billion. VDHG provides massive diversification across international shares and assets classes in one reasonably priced product. It also offers potential long-term capital growth along with dividend income and franking credits.
The ETF is a passive index fund tracking the High Growth Composite Index. The Fund invests in a diversified portfolio of securities and assets, which means the Fund is less exposed to the performance fluctuations of individual securities and the overall stock market. The fund takes a passive index 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. However, this is in relation to broad market indexes. The exact stats are unclear for funds not based on a broad market index.
VDHG Share registry: Computershare. Through Computershare, you can manage your holdings and communications, and also select whether or not to reinvest distributions.
VDHG 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 Diversified High Growth Index ETF seeks to track the weighted average return of the various indices of the underlying funds in which it invests, in proportion to the Strategic Asset Allocation, before taking into account fees, expenses, and tax.” Source, Vanguard
The Benchmark Index
VDHG is benchmarked against the High Growth Composite Index. The index has been created by Vanguard based on the ownership of several subindices.
The exactly Index definition is:
- 36% S&P/ASX300 Index
- 26.5% MSCI World ex-Australia Index (with net dividends reinvested) in Australian dollars
- 16% MSCI World ex-Australia Index (with net dividends reinvested) hedged to Australian dollars
- 6.5% MSCI World ex-Australia Small Cap Index (with net dividends reinvested) in Australian dollars
- 5% MSCI Emerging Markets Index (with net dividends reinvested) in Australian dollars
- 3% Bloomberg AusBond Composite 0+ Yr Index
- 7% Bloomberg Barclays Global Aggregate Float-Adjusted and Scaled Index hedged to Australian dollars.
The fund is allowed to operate in a broad range of the index, as such portfolio turnover is quite low.
We can see VDHG is diversified across global equities and income assets. Here we have broken down the top five components of each VDHG holding:
Vanguard Australian Shares Index Fund: 36%
|Holding||% Of Fund||% Of VDHG|
Vanguard International Shares Index Fund and Hedged: 26.5% and 16% (42.5% total)
|Holding||% Of Fund||% Of VDHG|
Vanguard Global Aggregate Bond Index Fund: 7%
|Holding||% Of Fund||% Of VDHG|
|Fannie Mae or Freddie Mac||0.94412%||0.066|
|United States Treasury Note/Bond||0.51130%||0.036|
|French Republic Government Bond OAT||0.48913%||0.034|
|Fannie Mae or Freddie Mac||0.47317%||0.033|
|United States Treasury Note/Bond||0.44814%||0.031|
Vanguard International Small Companies Index Fund: 6.4%
|Holding||Code||Country||% Of Fund||% Of VDHG|
|AMC Entertainment Holdings Inc. Class A||AMC||US||0.25923%||0.0165|
|Diamondback Energy Inc.||FANG||US||0.19704%||0.0126|
|Nuance Communications Inc.||NUAN||US||0.18872%||0.0120|
|Signature Bank/New York NY||SBNY||US||0.15821%||0.0101|
Vanguard Emerging Markets Shares Index Fund: 5.1%
|Holding name||Ticker||Country||% Of Fund||% Of VDHG|
|Taiwan Semiconductor Manufacturing Co. Ltd.||2330||TW||6.10228%||0.3112|
|Tencent Holdings Ltd.||700||CN||5.01890%||0.2559|
|Alibaba Group Holding Ltd.||9988||CN||4.97885%||0.2539|
|Samsung Electronics Co. Ltd.||005930||KR||3.93021%||0.2004|
|Meituan Dianping Class B||3690||CN||1.72502%||0.0879|
Vanguard Australian Fixed Interest Index Fund: 3%
|Holding name||% Of Fund||% Of VDHG|
|Australia Government Bond 4.25||3.21681%||0.0965|
|Australia Government Bond 3.25||3.12555%||0.0937|
|Australia Government Bond 2.5||3.05999%||0.0917|
|Australia Government Bond 3.25||2.96878%||0.0890|
|Australia Government Bond 2.75||2.73407%||0.0820|
Top 10 Holdings
After accounting for the top holding within each fund we can see the total top 10 holdings within the fund are:
- CBA 3%
- BHP 2.423%
- CSL 2.197%
- AAPL 1.724%
- WBC 1.603%
- NAB 1.463%
- MSFT 1.455%
- AMZN 1.104%
- GOOG 0.558%
- Taiwan Semiconductor Manufacturing 0.311%
From this, we can see VDHG still has a large weighting towards Australian shares. The top three holdings being Australian shares and weighted above some big international companies such as Apple, Microsoft, and Amazon.
VDHG Bond and Fixed Income Allocation
VDHG also holds ‘Income assets’ as part of its portfolio. This is comprised of:
- Vanguard Global Aggregate Bond Index Fund (Hedged) 7%; allowable range 5-9%
- Vanguard Australian Fixed Interest Index Fund (Wholesale) 4%; allowable range 1-5%
Together these assets makeup 10% of the holdings but are allowed to range from 8-12%.
The Bond allocation
Vanguard Global Aggregate Bond Index (Hedged) ETF seeks to track the return of the Bloomberg Barclays Global Aggregate Float-Adjusted and Scaled Index hedged into Australian dollars.
The fund invests in bonds of BBB- standard or higher. It holds a mixture of global governments, government-owned entities, government-guaranteed entities, investment-grade corporate issues, and securitized assets.
The fund has a total of 10,107 holdings, with an average credit quality of AA-
We can see the large majority of allocations are towards government treasury bonds. When we have a look at the regional allocation the large majority (41.8% are US bonds)
Top Three Regions:
- US 41.8%
- Japan 9%
- France 6.4%
- AAA 41.2%
- AA 16.2%
- A 22.2%
- BBB 19.7%
- Not rated 0.7%
Fannie Mae or Freddie Mac issues are the largest holdings of the fund.
|Security||Rate||Maturity date||% of net assets|
|Fannie Mae or Freddie Mac||2||14 Jul 2021||0.94412%|
|United States Treasury Note/Bond||0.125||15 Dec 2023||0.51130%|
|French Republic Government Bond OAT||—||25 Feb 2023||0.48913%|
|Fannie Mae or Freddie Mac||2.5||14 Jul 2021||0.47317%|
|United States Treasury Note/Bond||0.375||31 Dec 2025||0.44814%|
|United States Treasury Note/Bond||0.625||31 Mar 2027||0.37675%|
|Bundesobligation||—||14 Apr 2023||0.33750%|
|United States Treasury Note/Bond||0.375||30 Nov 2025||0.33140%|
|Ginnie Mae||2||21 Jul 2021||0.33117%|
|Bundesobligation||—||11 Apr 2025||0.31204%|
|Italy Buoni Poliennali Del Tesoro||1.85||01 Jul 2025||0.27203%|
|French Republic Government Bond OAT||0.5||25 May 2029||0.26117%|
|United States Treasury Note/Bond||0.125||15 Feb 2024||0.25169%|
|Bundesobligation||—||10 Oct 2025||0.25119%|
|Fannie Mae or Freddie Mac||2||19 Jul 2021||0.24946%|
Vanguard Global Aggregate Bond Index (Hedged) ETF VBND Performance
|Month||YTD||1 Year||3 Year|
The Fixed Income Allocation
VDHG’s fixed income allocation comes from the Vanguard Australian Fixed Interest Index Fund.
The Vanguard Australian Fixed Interest Index Fund seeks to track the return of the Bloomberg AusBond Composite 0+ Yr Index before taking into account fees, expenses, and tax.
The Fund invests in high-quality, income-generating securities issued by the Commonwealth Government of Australia, Australian State Government authorities and treasury corporations, investment-grade corporate issuers, as well as overseas entities that issue debt in Australia, in Australian dollars. Source, Vanguard
The fund has a total of 188 holdings, with an average credit quality of AA+
Once again the large majority of allocations are towards government treasury bonds. When we have a look at the regional allocation the large majority (87.5%) are Australian bonds.
Top Three Regions:
- Australia 87.5%
- Supranational 4.7%
- Germany 2.3%
- AAA 65.8%
- AA 28.0%
- A 3.3%
- BBB 2.9%
|Security||Rate||Maturity date||% of net assets|
|Australia Government Bond||4.25||21 Apr 2026||3.21681%|
|Australia Government Bond||3.25||21 Apr 2029||3.12555%|
|Australia Government Bond||2.5||21 May 2030||3.05999%|
|Australia Government Bond||3.25||21 Apr 2025||2.96878%|
|Australia Government Bond||2.75||21 Nov 2029||2.73407%|
|Australia Government Bond||5.5||21 Apr 2023||2.66848%|
|Australia Government Bond||1||21 Dec 2030||2.64650%|
|Australia Government Bond||2.75||21 Nov 2028||2.50197%|
|Australia Government Bond||4.75||21 Apr 2027||2.49446%|
|Australia Government Bond||0.25||21 Nov 2024||2.44883%|
|Australia Government Bond||1||21 Nov 2031||2.20208%|
|Australia Government Bond||1.5||21 Jun 2031||2.18819%|
|Australia Government Bond||2.75||21 Apr 2024||2.18363%|
|Australia Government Bond||2.25||21 Nov 2022||2.01965%|
|Australia Government Bond||0.25||21 Nov 2025||1.95358%|
We can see the primary focus is Australian Government Bonds.
Vanguard Australian Fixed Interest Index Fund Performance
|Month||YTD||1 Year||3 Years||5 Years||10 Years||Inception|
The Impact of Fixed Income Assets on Fund Performance
When compared against VDAG (world ex-Australia hedged) and VAS (ASX 200) we can see that VDHG’s small allocation to fixed income may be responsible for smoothing out returns over the COVID crash.
- VGAD experienced a drop of 37.09%
- VAS experienced a drop of 38.3%
- VDHG experienced a drop of 30%
However, we can see the bull market after the crash has driven substantial gains where we can see that VDHG has fallen flat compared to broad market index funds.
Over a one year period:
- VGAD is up 19.78%
- VAS is up 25.53%
- VDHG is up 15.05%
We can also see from the graph below that long-term investors holding before and after the crash would be better off in VGAD or VAS.
Bonds and fixed income are can be added to a portfolio to reduce risk and smooth returns. However, over the long run equities have been shown to far outperform bond returns. The COVID period has demonstrated this well, we see the smoothing effect during the downturn and the vast outperformance during the bull market.
However, we can see that investors have performed much better by adopting a buy-and-hold mentality. Investors that didn’t sell during the downturn were much better off investing in equities.
In the current market condition, we are seeing low-interest rates, with growing inflation. With the reduction in returns from cash and bonds, investors have turned heavily to equities.
VDHG Shares Fees
- Management Fee: 0.27% 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 VDHG) 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%||?||0.02%||0.04|
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VDHG ETF Share Price: Performance
In the below table we set out the returns of VDHG compared to its 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 VDHG to several other popular ETFs. They are expressed as average returns per annum. We can see VDHG has performed well in the past and has been very competitive. Although we would like to see its performance over a longer time frame.
|Month||YTD||1 year||3 years||5 years||10 years||Inception|
The below performance graph by Vanguard demonstrated the cumulative total returns of VDHG over varying periods. We can see that the total investor returns over the course of 3 years are 38.10% and 45.34% since its inception in 2017.
Should I Buy VDHG: Competitors
The main competition for VDHG in the High Grow Diversified index space is the BetaShares Diversified All Growth ETF which was established in late 2019.
This comes after the launch of A200 in 2018 as Betashares has been releasing low-cost fees in direct competition to some of Vanguard’s largest funds. DHHF does not have a fixed income allocation.
|Benchmark||High Growth Comp.||-all cap, all world||MSCI World ex-Aus||S&P 500||S&P/ASX 300 Index|
|Number of Holdings||7*||4*||1505||509||307|
|Assets Under Management||$1.1B||$68M||$1.8B||$4.5B||$8.5B|
|Inception Date||20 Nov 2017||3 Dec 2019||20 Nov 2014||10 Oct 2007||4th May 2009|
|Distribution Reinvestment Plan||Yes||Yes||Yes||Yes||Yes|
|Total 3-Year Returns||11.36% p.a||–||13.55% p.a||17.62 p.a.||10.08% p.a|
From our comparison, we can see that VDHG is a much larger fund in terms of assets under management compared to the newly launched DHHF. VDHG has a very low turnover ratio due to its large portfolio allowable range. Although in saying this all these funds have a very low turnover. We can see VDHG does have higher fees than simple broad market index funds.
At the current rates, VDHG pays a distribution of $5.5275 or $5.6942 gross. This gives VDHG a dividend yield of 9.16% and 9.44% gross. The distribution amount and yield are relatively high compared to the historical trends, this is due to large distributions in 2021.
VDHG has always paid a large distribution, this is linked to its holdings in the International Shares Index (Hedged). Hedging currencies required a lot of buying and selling with the income then passed onto shareholders. The fixed income component also realizes a large amount of income.
The high distribution can actually be seen as a downside to the fund as this creates a large tax liability for investors which can reduce the overall net performance of the fund.
Non-hedged Funds which pay out very low distributions such as S&P 500 funds can be very attractive for net returns, due to their lower tax liabilities.
Since VDHG isn’t completely Australian shares the franking credits are also low averaging 2-38%, thus there are limited credits to offset the tax liabilities.
VDHG Distribution History (Previous Two Years)
|Distribution date||CPU||Ex-entitlement date||Record date||Payable date||Re-invest price (AUD)|
|30 Jun 2021||162.495680||01 Jul 2021||02 Jul 2021||16 Jul 2021||$59.4612|
|31 Mar 2021||200.989644||01 Apr 2021||06 Apr 2021||20 Apr 2021||$56.7864|
|31 Dec 2020||99.376695||04 Jan 2021||05 Jan 2021||19 Jan 2021||$56.1345|
|30 Sep 2020||89.891492||01 Oct 2020||02 Oct 2020||16 Oct 2020||$52.0017|
|30 Jun 2020||125.974551||01 Jul 2020||02 Jul 2020||16 Jul 2020||$51.5778|
|31 Mar 2020||44.916175||01 Apr 2020||02 Apr 2020||20 Apr 2020||$47.3967|
|31 Dec 2019||33.277417||02 Jan 2020||03 Jan 2020||17 Jan 2020||$56.9673|
|30 Sep 2019||38.091608||01 Oct 2019||02 Oct 2019||16 Oct 2019||$55.5607|
|30 Jun 2019||104.838248||01 Jul 2019||02 Jul 2019||16 Jul 2019||$54.4248|
|31 Mar 2019||44.891241||01 Apr 2019||02 Apr 2019||16 Apr 2019||$52.6185|
As an ETF is a trust structure the fund will payout all its earnings after expenses to investors.
When does VDHG pay dividends? Historically VDHG 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. VDHG investors are eligible to participate in a Distribution Reinvestment Plan (DRIP), which can be set up through the share registry, Computershare.
Should I Buy VDHG ETF: Prophet’s Take
VDHG provides efficient exposure to a range of international shares and fixed income assets in one simple easy product. Its low cost is an excellent option for many beginning and expert investors looking for diversification.
Due to the holdings allocation of the fund, there is a large portion of Australian shares. These are held out of proportion, for example, Commonwealth Bank has a higher allocation than Apple and Amazon combined. The hedging and fixed income assets also make the fund relatively tax-inefficient which can reduce investor’s net returns.
In terms of competition, Betashares has recently launched DHHF which seems to be a direct competitor to VDHG without the fixed income holdings. This fund has a lower management fee of 0.19% compared to VDHG’s 0.27%. With this fund being launched in Dec 2019 their AUM are still low, and long-term returns are unclear.
The fixed-income assets of VDHG proved to smooth investor returns during the downturn but were a liability for the fund during the bull market. Since the COVID crash, VAS and VGAD have both delivered stronger returns.
VDHG is an excellent way to gain diversification, I am very Bullish on VAS. However, I personally prefer some other alternatives that are more tax-efficient and don’t have an allocation to bonds and fixed income. For example, I hold a large amount of VAS in our portfolio.
Pearler offers free brokerage on a range of ETFs, although VDHG isn’t one of them check out pearler here.
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