Today I’m talking about Australian ETF Selection with a focus on Vanguard ETFs.
I’ve only recently started investing in ETFs – actually, I only started earlier
this year – and I think that ultimately ETFs will be the main part of my portfolio.
So what’s an ETF?
An ETF is an Electronic Traded Fund, that is, it’s an investment fund that is traded
on a securities exchange market like the Australian ASX.
They’re typically a diversified portfolio of securities that track a particular asset
or index (although, there are actively managed ETFs as well that try to outperform the given
market or index).
So for example, VTS – Vanguard U.S.
Total Market Shares Index ETF seeks to track the performance of the CRSP US Total Market
Index, providing investors with exposure to a broadly diversified collection of securities
that, in the aggregate, approximates the full index in terms of key characteristics.
As we can see here, VTS is made up of 3638 holdings where the top 10 represent 17.2%
of the total ETF.
Companies like Apple, Microsoft, Alphabet, Amazon, and Facebook.
So in this video, I’m going to specifically talk about which ETFs I chose and the reasons
behind those decisions.
First of all, I decided to buy only Vanguard ETFs.
Vanguard is one of the big players and typically has low fees and a solid performance history
for their index funds.
I believe they were the first ones to come up with the whole idea of indexing.
You can take a look for yourself at the full list of Vanguard ETFs.
They include ETFs for fixed interest, property, Australian shares, international shares, and
their own diversified ETFs which are made up of various proportions of the previous
four categories.
After doing a bit of research, I decided that I wanted to invest in 25% Australian shares
and 75% international shares.
Most Australian financial planners typically recommended a greater proportion of Australian
securities, but I figure that Australia is only one market so 25% is plenty.
For the Australian component, Vanguard’s VAS meets my needs.
It includes the 300 largest Australian companies.
It has a fairly low management fee of 0.14%.
It has quarterly distributions and also has a distribution reinvestment plan.
This allows you to automatically reinvest distributions at a discounted rate, as well
as not having to fork out extra brokerage fees.
The top ten holdings include the Commonwealth Bank, Westpac, BHP Billiton, ANZ, NAB, CSL,
Wesfarmers, Telstra, Woolworths, and Macquarie Group, which together represent 43.8% of the
total ETF.
As you can probably tell, this list is primarily made up of financials, materials, and consumer
staples.
If you look at its performance returns, it averages over 10% p.a. over the last five
years.
Now looking at the global part of my portfolio, I decided to invest 25% in Vanguard’s VGS.
It tracks the MSCI World ex-Australia (that is, everywhere but Australia) and is comprised
of 1589 holdings.
For a management fee of only 0.18%, this is a really cost effective way to gain exposure
to some of the world’s biggest companies.
It also has quarterly distributions with a distribution reinvestment plan available.
If you look at its country allocation, you can see that it’s heavily invested in the
United States, Japan, UK, France, Germany, Canada, Switzerland, Hong Kong, and so on.
So primarily North America, Europe, and some of Asia.
It’s top ten companies include Apple, Alphabet (Google’s parent company), Microsoft, Amazon,
Facebook, etc.
Historical performance charts show that it has been averaging over 11% p.a. over the
last three years, and over 13% in the last year!
So now we have 25% VAS and 25% VGS.
What’s next?
Well, there’s an ETF that is very similar to VGS called VGAD.
It’s essentially the same as VGS except for one major difference.
The ETF is hedged to Australian dollars so the value of the Fund is relatively unaffected
by currency fluctuations.
It has a slightly higher management fee of 0.21% and only has half yearly distributions,
but the holdings are the same.
As you can see here, the country allocation and top ten holdings are identical to VGS.
Its historical performance has been quite good with three-year returns averaging 11.35%
p.a. and a massive 20.23% return over the last year!
Of course, historical performance is no indicator of future performance.
You could in theory just go with one of these.
For example, 50% in VGS if you’re not too worried about currency fluctuations.
I’ve posted a link below to a Morningstar interview with Jonathan Shead who talks about
hedged ETFs in detail.
Basically, when the Australian dollar is appreciating in value against foreign currencies, then
a hedged ETF will do well.
If the Australian dollar is falling, then unhedged ETFs will do better.
I chose to hedge my bets, so to speak, and have 25% of each.
And finally, I wanted to choose something a little bit riskier and cover some of the
countries that my current portfolio doesn’t cover.
The elephant in the room is China.
Luckily, Vanguard have an ETF that covers the major non-Japanese countries in Asia called
VAE.
It has a fairly high management fee of 0.40%, but quite frankly, it’s a lot easier investing
in this than trying to buy individual Chinese stocks.
I wouldn’t even know where to begin, honestly.
It has quarterly distributions as well as access to a distribution reinvestment plan
with a total of 813 holdings.
If you look at the country allocation, it’s got heavy investment in China, Korea, Hong
Kong, Taiwan, India, and Singapore.
It’s a great way to round off my portfolio and get a broad international exposure.
It’s top ten holdings include Tencent, Samsung, Alibaba, China Mobile, etc.
If you look at its recent performance, it has done very well.
28.7% in the last year!
Of course, it’s probably fairly risky, but I think the future lies in Asia.
So there’s my final ETF portfolio.
25% VAS, 25% VGS and VGAD, and 25% VAE.
That covers Australia, North America, Europe and Asia.
I’m planning to stick with this allocation for at least the next few years.
With ETFs, you really have to.
Even though they’re tradeable on the stock exchange, you’ve got to treat them like
a long term investment.
So if their value goes down in the short term, don’t sell them – you’d only be locking
in a loss.
Anyway, I hope you’ve enjoyed today’s video.
Let me know what you think in the comments section below.
Cheers!