Is the Vanguard Australian Shares Index ETF (VAS) the best way to invest in ASX shares?

The Vanguard Australian Shares Index ETF (ASX: VAS) is the most popular exchange-traded fund (ETF) for accessing ASX shares. The fund has around $22 billion of investor money allocated to it.  

But, being the biggest doesn’t necessarily mean it’s the best choice for Aussie investors.

Vanguard is one of the world’s best ETF providers, in my opinion. It wants to offer investors investment funds that give exposure to shares (and bonds) with very low fees.

There are a number of good reasons to want to invest in the VAS ETF, such as its low fees, the diversification on offer and a solid dividend yield. But, depending on why Aussies are picking the Vanguard offering, there are other options that could fit the bill even better.

Fees

Arguably, the most appealing aspect of the Vanguard Australian Shares Index ETF is that its annual management fee is just 0.07% per year. That’s close to nothing!

Low costs are great because it means more of the returns and fund value are left in the hands of the investor. There are no performance fees either.

While the VAS ETF is one of the cheapest options on the ASX, there is an even cheaper option: BetaShares Australia 200 ETF (ASX: A200). The BetaShares offering has an annual fee of just 0.04%, which is even closer to nothing.

Interestingly, at the time of writing, the A200 ETF’s return has slightly outperformed the VAS ETF over the last three years and five years. Of course, past outperformance doesn’t mean it’ll continue.

Diversification

Another positive characteristic of the VAS ETF is its diversification.

The Vanguard fund owns 300 businesses because it tracks the S&P/ASX 300 Index (ASX: XKO), an index of 300 of the largest companies on the ASX. That’s seemingly a good level of diversification.

It owns names like Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), Wesfarmers Ltd (ASX: WES), CSL Ltd (ASX: CSL), Macquarie Group Ltd (ASX: MQG), Goodman Group (ASX: GMG) and Telstra Group Ltd (ASX: TLS).

However, the largest businesses have a very big weighting on the ASX, making it seem less diversified than it looks.

Those ten names I mentioned above account for around 44% of the VAS ETF portfolio and the other 290 names make up the other 56%.

Additionally, around 54% of VAS ETF is invested in just ASX financial shares and ASX mining shares. Ideally, it’d be useful if other sectors had a larger allocation.

VanEck Australian Equal Weight ETF (ASX: MVW), as the name of suggests, owns a portfolio of names that it aims to provide investors with an equal weighting to. It’s not strongly exposed to any single ASX share or sector.

The MVW is currently invested in 72 names such as Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST), South32 Ltd (ASX: S32), Whitehaven Coal Ltd (ASX: WHC), Reece Ltd (ASX: REH) and Orica Ltd (ASX: ORI).

The VAS ETF is not as diversified as it could be. I’m not suggesting to replace the VAS ETF with the MVW ETF, but they could work well together to reduce the exposure to a few large businesses.

Dividend yield

One advantage of ASX blue-chip shares over international shares is their typically higher dividend yield. According to Vanguard, the VAS ETF has a dividend yield of 3.1%, with franking credits a bonus on top of that yield.

But, there’s a Vanguard offering that tries to provide investors with an even higher dividend yield. The Vanguard Australian Shares High Yield ETF (ASX: VHY) invests in businesses that have higher forecast dividends compared to other ASX shares.

The VHY ETF has a dividend yield of 4.3% excluding franking credits and 5.8% including franking credits, which is noticeably stronger than the VAS ETF. So, the high-yield option could be a better idea for income-focused investors.

Overall, the VAS ETF is still a very effective option for Australians and has positive aspects. But, I think it’s useful to assess whether there’s an even more appealing option, depending on someone’s objectives.

The post Is the Vanguard Australian Shares Index ETF (VAS) the best way to invest in ASX shares? appeared first on The Motley Fool Australia.

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• These are the ASX ETFs I would buy if the market crashed tomorrow
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• Forget Westpac shares, these ASX ETFs could be better buys

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Goodman Group, Macquarie Group, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Macquarie Group and Telstra Group. The Motley Fool Australia has recommended BHP Group, CSL, Goodman Group, Vanguard Australian Shares High Yield ETF, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.