Should I buy VAS or VDHG?

The answer is not so simple but read on to understand the fundamentals.

It depends…the answer is not so simple as they are fundamentally different investments. It’s almost like me asking you if I should eat an apple or have a fruit salad?

This is a question most first time investors ask their friends and family. Sometimes, well-meaning older relatives give this advice to you so that you don’t spend away all your disposable income on drinks with friends and designer sunglasses.

So let’s get to brass tacks. What are these three letter acronyms? Well they are types of ETF’s (Exchange Traded Funds) issued by the Vanguard Group who have around $7 trillion in funds under management. The founder John Bogle is credited with the creation of index funds and low cost passive investing.

But what are Exchange Traded Funds? Simply put they are managed funds but can be bought and sold like a share on the stock exchange. All shares have a three letter code like CBA, BHP etc which you maybe already familiar with.

Following the same naming convention, VAS stands for Vanguard Australian Shares Index Fund. It typically owns around 300 securities that comprise of the ASX 300 index. The larger companies will take up a bigger share just like the index as shown below. As the share prices of these companies fluctuate their share in the basket will also go up and down.

Image Credit: AU_ETC_Profile_flyer_VAS.pdf

As you can see it provides a diverse exposure to all the major industries in the Australian economy. And so compared to shares for a small outlay you can get exposed to 300 companies versus shares in one bank or one mining company.

And so back to the original question. What is VDHG? It is also an ETF and stands for Vanguard Diversified High Growth Index ETF.

This fund invests in over 16,000 securities over the globe, while VAS invests only in companies that make up the ASX 300.

And so how does it do that whilst maintaining the low cost it is known for. It invests in its own managed funds as shown in the picture below.

Image Credit: AU+ETC-Profile_flyer_VDHG.pdf

You may notice another term that you have not heard before — Strategic Asset Allocation. What this refers to is the fact that the portfolio manager can move between these percentages in the medium term as along as the Target Asset Allocation of 90% to equity (growth assets) and 10% to income (fixed income) assets is maintained over the long term.

Fees & Costs

Fund manager fees

So how much does it cost to invest in these two ETF’s ?.

The Management Expense Ratio (MER) is the fancy term for fees is 0.27% for VDHG & 0.07% for VAS. To give you an example if you have $10,000 invested with both of these funds, VAS will take $7 as their fee and VDHG would take $27 as their fee for managing your money.

Brokerage

Remember at the start I mentioned that they are like a share that can be bought and sold on the ASX. And as with shares you have to pay brokerage every time you buy and sell these ETF’s. Do your research on trading platforms as there are a lot in the market today and some of them give free brokerage for 5 trades or so, if you sign up using a referral coupon. These days brokerage can be around $9.95. I remember just around 10 years ago it was almost double the price. You can also choose to go with an wrap investment platform who will charge you an administration fee ,however their performance reporting and tax reports will be beneficial to you if you don’t mind the extra cost.

Distributions

Just like a share pays dividend these ETF’s pay a distribution. Both VAS and VDHG pay on a quarterly basis and you can choose to reinvest this distribution and obtain more units in case you do not want it paid out in cash.

Do be mindful that you will have to still pay tax depending on how the fund performed that year. There are detailed tax reports provided by Vanguard which you will need to provide your tax agent when filing your return.

Even as a newbie investor you would have gauged that though both these funds fall in the category of ETF’s they are essentially quite different. Your long term goals and risk tolerance will play a big part in determining which one you should choose.

This article is not deemed to be financial advice but purely for educational purposes only. Please consult a licenced financial advisor should you want to make investment decisions based on the information above.