Australian Domiciled ETFs

Today comes a question from one of our readers Matty.

Hi ETF Bloke. Thank you for making such an easy to understand resource for someone like myself who is new to ETF’s

Yeah no worries Matty, happy to help.

My question is: is there a good ETF equivalent to VTS that is domiciled in Australia? I am looking for pure American exposure without any international companies in the mix.

As Matty correctly states VTS is an American Domiciled ETF not an Australian Domiciled ETF. Although you can purchase VTS on the ASX, the ETF is actually based in the USA. This means if you own VTS you have the added complication of having to deal with the US tax system at tax time.

If you buy VTS you will need to complete US Tax forms such as the W-8BEN in addition to your usual Australian Tax return. Investing in American Domiciled ETFs also opens you up to the possibility of paying death taxes (to the US government!)

Any changes the USA decides to make for foreign investors in the future would become your problem.

I don’t know about you but I don’t have time for keeping up with the US tax system. Keeping on top of the ATO is enough for me!

I avoid that nonsense by only investing in Australian Domiciled ETFs.

And it sounds like Matty wants to do the same.

Let’s take a look at what the VTS ETF invests in so that I can help Matty out in finding an equivalent Australian Domiciled ETF.

American Domiciled Funds

• VTSAX: Vanguard Total Stock Market Index Fund
• VTI: Vanguard Total Stock Market ETF
• VTS: Vanguard US Total Market Shares Index ETF

VTS is an Australian ETF that is based on one of Vanguard America’s Managed Funds known as VTSAX: Vanguard Total Stock Market Index Fund Admiral Shares

There is an equivalent American ETF trading on the US markets that tracks this managed fund known as VTI: Vanguard Total Stock Market ETF

When you jump across the pacific, Vanguard’s Australian ETF that is equivalent to both VTSAX and VTI trades on the ASX as VTS: Vanguard U.S. Total Market Shares Index ETF

Check out my What Is An ETF post if you need to understand the difference between an ETF and a Managed Fund.

VTS aims to track the return of the CRSP US Total Market Index.

As the name suggests, this Index basically tracks all stocks that exist in the US stock market. Buying VTS is a simple way to invest in every US stock.

Currently VTS is invested in approximately 3,500 US stocks

Equivalent Aussie ETFs

There are three Australian Domiciled ETFs worth considering to replicate what VTS invests in:

• IVV: S&P 500 ETF (Large-cap)
• IJH: S&P 400 ETF (Mid-cap)
• IJR: S&P 600 ETF (Small-cap)

These ETFs are all offered by Blackrock Australia as Australian Domiciled ETFs under their iShares brand.

The best Australian Domiciled ETF to track the US Market is IVV: iShares S&P 500 ETF

IVV invests in the S&P 500 which measures the performance of 500 large companies listed on the US Stock Markets. IVV and the S&P 500 covers approximately 80% of the US Stock Market Capitalization. At the time of writing the minimum market cap for a company to enter the S&P 500 was $8.2 billion USD.

Although IVV holds 500 stocks and VTS holds 3,500+ stocks, you can get 80% of the same performance by investing in IVV as you would from investing in VTS. This is because the S&P 500 is such a large constituent of the US Stock Market.

If you want to replicate VTS as closely as possible then you need to buy not only IVV but also IJH and IJR.

IJH: iShares Mid-cap ETF invests in the S&P Mid-cap 400 index. These mid-cap stocks are companies that are smaller in value then the stocks that make up the S&P 500. IJH and the S&P 400 covers approximately 7% of the US Stock Market Capitalization. At the time of writing the S&P 400 contained stocks with a market cap between $2.4 billion and $8.2 billion USD.

IJR: iShares Small-cap ETF invests in the S&P Small-cap 600 index. These small-cap stocks are companies that are smaller in value then the stocks that make up both the S&P 500 and the S&P 400. At the time of writing the S&P 600 holds stocks with a market cap between $600 million and $2.4 billion USD.

Anything worth less than $600 million USD is known as a micro-cap or nano-cap company. These companies are so small that it isn’t worth worrying about for the average ETF Bloke so give them a miss.

The Best Australian Domiciled ETFs

Investing in IVV + IJH + IJR will allow you to own the top 1,500 stocks in the US Market using Australian Domiciled ETFs.

IVV + IJH + IJR are not 100% equivalent to VTS but you will barely notice the difference. The only stocks missing from these three ETFs are micro-cap and nano-cap stocks that are valued at less than $600 million and have little impact on your portfolio.

Hope that answers your question Matty!

If you want to get in touch with ETF Bloke drop me a line on the Contact page and I will get back to you.