The Vanguard Australian Shares ETF (ASX:VAS) is about to get a major 2022 makeover. Here’s what is changing…

Key points

• VAS is the most popular and widely-held ASX index exchange-traded fund (ETF)
• Uniquely, it tracks the ASX 300 index, which includes the largest 300 ASX shares
• VAS is about to undergo some major changes in its next rebalance to align with its index

It’s been a big month for the Vanguard Australian Shares Index ETF (ASX: VAS). Not just because of the gyrations we’ve seen in the Australian share market over 2022 thus far. Not that those are insignificant. Since the start of the year, the VAS share price has lost a nasty 7.1%, reflecting the volatility we have seen from the S&P/ASX 200 Index (ASX: XJO) and other ASX shares.

But that’s a pretty normal part of investing, even though we haven’t really seen volatility of this nature for quite a while. No, today, we’re discussing the changes that all ASX index-tracking exchange-traded funds (ETFs) are having to make to reflect some very big changes in the underlying indexes they track. Let’s dig in.

So VAS is a rather unique ASX ETF in that it is the only major index fund to track the ASX 300 Index (ASX: XKO), rather than the far more common ASX 200. That doesn’t have too much impact in terms of VAS’s long-term performance against ASX 200 ETFs but the difference is there. Because the ASX 300 index is spread out over an additional 100 companies compared to the ASX 200 index, VAS’s portfolio weightings are spread a little more thinly than other ETFs.

But how exactly will VAS holdings change in its next rebalance?

New kid on the Block

Well, like most ETFs, VAS will have to adapt to the holdings of its underlying index. And both the ASX 200 and the ASX 300 indexes have been forced to make some big changes over the past month or two.

The first major change follows the completed acquisition of Afterpay. As most investors would be aware, Afterpay was recently delisted and replaced with Block Inc (ASX: SQ2) shares. Block purchased Afterpay in an all-scrip deal. That means that all Afterpay shareholders had to hand in their Afterpay shares last month in return for Block shares.

Investors received 0.375 of a Block share for every Afterpay share owned. This, of course, has also resulted in Afterpay being kicked out of the ASX 200 and ASX 300 indexes to be replaced with Block.

Block shares represent shares in the entire Block company and not just its new Afterpay division. So that’s a presence of a US payments giant that wasn’t there a month ago.

VAS hasn’t yet updated its portfolio beyond 31 December. But as of that date, Afterpay commanded a VAS portfolio weighting of roughly 0.95%. Looking at the updated figures of ASX 200 ETF iShares Core S&P/ASX 200 ETF (ASX: IOZ), we see that Block now has a 0.81% weighting in that ETF. So it’s now likely something similar will occur for VAS.

VAS has got a brand new BHP

Secondly (and more impactfully), we have the unification of BHP Group Ltd (ASX: BHP). Until this week, BHP held a dual-listing across both the ASX and the London Stock Exchange. That meant that BHP’s full market capitalisation was split across these 2 share markets.

But last year, BHP announced that it would be ending this dual-listing structure and moving exclusively to the ASX. That means that all of those London-listed shares have had to relocate to the ASX, which occurred this week. This has pushed up BHP’s weighting in the ASX 200 and ASX 300 indexes.

As of 31 December, BHP had a 5.57% weighting in VAS’s portfolio. But now that unification has been completed, BHP is now the top share in the iShares ASX 200 ETF. It now has a weighting of 10.82% in IOZ. That comes in way ahead of the silver medallist, Commonwealth Bank of Australia (ASX: CBA), with its weighting of 7.62%.

Again, we will probably see a similar change in VAS when it updates its share portfolio. This far higher weighting means that BHP shares now have far more influence on the entire ASX 200 and ASX 300 than they used to.

So those are the not-insignificant changes that VAS will be undertaking in its next update. Indexes naturally shift and evolve over time. But these changes are without a doubt the most significant the ASX indexes have seen for years.

VAS charges a management fee of 0.1% per annum and has delivered an average annual return of 10.69% over the past 10 years. At the time of writing, the VAS share price is $90.47, down 0.23% for the day and down 6.8% year to date.

The post The Vanguard Australian Shares ETF (ASX:VAS) is about to get a major 2022 makeover. Here’s what is changing… appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Block, Inc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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