Two of the most popular ASX exchange-traded funds (ETFs) on the market today are Vanguard Australian Shares Index ETF (ASX: VAS) and Vanguard Australian Shares High Yield ETF (ASX: VHY).

In an article, Jamie Nemtsas, founder of retirement wealthy advisory, Wattle Partners, explains which ASX ETF he likes better for clients in retirement.

The result may surprise you.

What are VAS and VHY ETFs?

Firstly, let’s go over the differences between VAS ETF and VHY ETF.

VAS ETF

VAS provides easy exposure in a single trade to the top 300 companies by market cap on the ASX. 

The ETF seeks to mirror the returns of the S&P/ASX 300 Index (ASX: XKO), before fees.

ASX VAS is the most popular ETF on the market, with $25.7 billion in funds under management (FUM).

VHY ETF

VHY ETF is full of ASX dividend shares that have higher forecast dividend yields than their peers.

This ETF tracks the FTSE Australia High Dividend Yield Index, before fees.

VHY ETF has a few rules: It doesn’t invest more than 40% of funds in any one industry, nor more than 10% in any one stock.

VHY holds 73 shares across all sectors bar real estate investment trusts (REITs), and has $7.67 billion in FUM.

Both ASX ETFs pay distributions (dividends) quarterly.

VAS vs. VHY ETF in retirement

Nemtsas reviewed the 15-year performance of the VAS and VHY ETFs to decide which one he felt was the better pick for retirement.

His answer: VAS.

Nemtsas said:

While a high-dividend ETF looks tempting for retirement income, the hidden structural trade-offs can derail long-term wealth.

Nemtsas gives five reasons as to why he prefers VAS ETF for retirement.

1. Portfolio diversification

VAS holds about 300 shares while VHY holds 73.

This means VHY’s portfolio is more concentrated in the banks and miners through their weightings.

The result, according to Nemtsas:

When BHP Group Ltd (ASX: BHP) halves the dividend, as it has twice in the last decade, VHY feels it harder.

When the banks compress payout ratios under APRA pressure, VHY feels that harder too.

2. Management fees

VAS charges an annual management fee of 0.07% while VHY charges 0.25%.

The 18 basis point difference compounds. On a $500,000 holding, that is $900 a year.

Over 20 years of retirement, with reinvestment, that is closer to $35,000. Fees are the one input you can guarantee. Yield is not.

3. Fund turnover and capital gains tax (CGT)

Nemtsas says VAS turns over less than 5% of its portfolio per year, while VHY turns over closer to 37% because it chases yield.

The result is capital gains tax events inside the fund, distributed back to unit holders in non-cash form at the end of the year.

Retirees in pension phase wear less of this, but the structural inefficiency is real and persistent.

4. Total return vs. headline dividend yield

Nemtsas says VAS has produced a higher average total return of 8% than VHY at 6.8% over the past 10 years.

He says:

That is the cost of buying yield by ignoring price.

The names with the highest forecast yield are typically the names the market is least optimistic about.

Sometimes the market is wrong. Often it is not.

5. VHY ETF’s higher yield is not free

Nemtsas explains:

VHY’s 6% versus VAS’s 3.6% comes from two places.

First, higher payout ratios in the names VHY overweights.

Second, the screening methodology itself, which mechanically tilts toward stocks where the dividend is high relative to a depressed share price.

Both effects can persist for years. Both also reverse.

The franking benefit in VHY is real, but VAS picks up plenty of franking through its Commonwealth Bank of Australia (ASX: CBA), BHP, Macquarie Group Ltd (ASX: MQG) and Wesfarmers Ltd (ASX: WES) exposure too.

The franking gap is narrower than the headline yield gap suggests.

The post VAS vs. VHY: Which is the better ASX ETF for retirement? appeared first on The Motley Fool Australia.

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• 3 ASX mining shares to buy now: experts
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Motley Fool contributor Bronwyn Allen has positions in BHP Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group and Wesfarmers. The Motley Fool Australia has recommended BHP Group, Macquarie 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.

A $50,000 investment can give investors a solid starting point on the ASX.

And with exchange traded funds (ETFs), it can easily be spread across Australia, global markets, technology, cybersecurity, and robotics.

Here is one way to invest $50,000 in ASX ETFs this month.

Vanguard MSCI Index International Shares ETF (ASX: VGS)

I would start with the Vanguard MSCI Index International Shares ETF.

A $20,000 investment in this fund could form the core of the portfolio.

It gives investors exposure to a large number of companies across developed markets, such as the United States, Europe, Japan, and other major economies. This includes global healthcare companies, technology leaders, consumer brands, industrial businesses, and financial giants.

This fund could act as the foundation before adding more targeted ETFs around it.

Vanguard Australian Shares Index ETF (ASX: VAS)

Next, I would consider putting $10,000 into the Vanguard Australian Shares Index ETF.

This fund provides broad exposure to the local share market. That means investors can own a slice of Australia’s banks, miners, healthcare shares, retailers, property groups, infrastructure businesses, and industrial companies in one trade.

It also gives the portfolio exposure to Australian dividends and franking credits.

The local market is not as deep as global markets, but it still deserves a place in a balanced ASX ETF portfolio.

Betashares Global Cybersecurity ETF (ASX: HACK)

I would then put $7,500 into the Betashares Global Cybersecurity ETF.

Cybersecurity has become a permanent cost of operating in the digital economy.

Companies need to protect data, networks, cloud systems, employees, customers, and payments. As more activity moves online, the risks become larger and more complex.

This ASX ETF gives investors exposure to companies trying to solve those problems through identity security, endpoint protection, cloud security, threat detection, and network defence.

It is more targeted than a broad market fund, but the long-term demand drivers are hard to ignore.

Betashares Asia Technology Tigers ETF (ASX: ASIA)

Another $7,500 could go into the Betashares Asia Technology Tigers ETF.

This fund gives investors exposure to Asian technology companies, including businesses linked to semiconductors, hardware, ecommerce, gaming, and digital platforms.

It is a different type of technology exposure from a US-focused fund. Asia plays a major role in both building the digital economy and serving large, fast-moving consumer markets.

The risks are higher because the fund is concentrated by region and sector, but the long-term growth potential remains attractive.

Betashares Global Robotics and Artificial Intelligence ETF (ASX: RBTZ)

The final $5,000 could go into the Betashares Global Robotics and Artificial Intelligence ETF.

This fund gives exposure to companies involved in robotics, automation, artificial intelligence, drones, unmanned vehicles, and intelligent machinery.

It is a higher-risk holding, so I would keep the allocation smaller.

The opportunity is tied to industries trying to improve productivity, reduce labour constraints, and use smarter machines in more settings.

It was recently recommended by analysts at Betashares.

The post Where to invest $50,000 in ASX ETFs this month appeared first on The Motley Fool Australia.

More reading

• How to go from zero to $50,000 with ASX shares
• I’d buy these 5 ASX dividend investments for retirement income
• ASX ETFs are booming. Should you join in?
• How should I invest my money in FY27?
• 3 ASX ETFs to buy and hold for 10 years

Motley Fool contributor James Mickleboro has positions in Betashares Capital – Asia Technology Tigers Etf. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Global Cybersecurity ETF. The Motley Fool Australia has recommended Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Investing your superannuation is a smart way to generate a reliable passive income for retirement.

Not only can it help you build wealth for later on in life, it also comes with the added bonus of low tax rates and long-term compounding.

But how much do you actually need in your super to be able to earn the passive income you want in retirement?

Let’s break it down, using a $50,000 per year passive income as an example.

How much do I need in my superannuation to earn $50,000 per year in passive income?

Working out the superannuation you’ll need to earn that level of passive income is more straightforward than you’d think.

Simply divide your annual passive income by the dividend yield of your portfolio.

Of course, the hard part is that the answer varies significantly depending on the dividend yield of your portfolio. 

For example, a portfolio with a dividend yield of around 5% only needs to be half the size of one with a dividend yield of around 2.5% to generate the same level of passive income. 

Breaking it down further

If your overall portfolio has a dividend yield of around 3%, you’ll need a balance of around $1.66 million to earn $50,000 per year in passive income.

Then, as your portfolio’s dividend yield increases, the superannuation balance required to earn the same passive income decreases. Say the yield of your portfolio is around 4%, for example, your balance would need to be closer to $1.25 million to earn the same dividend income.

For a 5% yielding portfolio, you’d need a balance of closer to $1 million to earn the same amount.

Increase that to a 6% or 7% dividend yield, and you’re looking at closer to $833,000 or $714,000. You’d still earn $50,000 per year in passive income from these portfolio sizes.

ASX shares around these dividend yields

There is a huge range of options, but here are a few of my favourite ASX dividend shares to get you started.

At a 2%-3% dividend yield, I’d look at well-known companies like Coles Group Ltd (ASX: COL) or Commonwealth Bank of Australia (ASX: CBA).

For options yielding closer to 4%, my choices would be banking giants such as National Australia Bank Ltd (ASX: NAB) or ANZ Group Holdings Ltd (ASX: ANZ).

If you want a slightly higher yield around 5% or 6%, I’d invest in something like Santos Ltd (ASX: STO) or Woodside Energy Group Ltd (ASX: WDS).

Then your high-yield players could include GQG Partners Inc (ASX: GQG) or IPH Ltd (ASX: IPH). These yield 7% or more.

The post How much do I need in my superannuation to get $50k per year in passive income? appeared first on The Motley Fool Australia.

More reading

• 9 ASX 200 shares with reiterated buy calls this week
• Which is the best buy, Coles shares or Wesfarmers shares?
• Your FY27 tax return will look different. Here’s what changed and how to prepare
• How to go from zero to $50,000 with ASX shares
• Forget CBA shares! I’d rather buy these ASX dividend shares

Motley Fool contributor Samantha Menzies has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Gqg Partners and IPH Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.