Sam writes to us today with a question about consolidating the number of Australian ETFs that he holds:
Hey EFT Bloke,
Oof rough start there Sammy. It’s actually ETF Bloke. But I’ll let you slide this time!
Only recently found your site/blog and love the simplicity to it all!
What can I say, I’m a simple bloke..
I am 27 now but was 22 when I first jumped into ETFs and I went a little crazy. I bought several (all vanguard) ETFs and now when I look at them I wonder if they can/should be condensed down a bit as I think some might overlap for no reason?
My current ETF portfolio is:
VDHG – Wondering if I should sell and buy more VAS?
VHY – Wondering if I should sell and buy more VAS?
VTS – Was unaware of the tax issues regarding this till reading your thoughts on it. Damn!
VGE – Looking to buy
VBND – Looking to buy
I was going to buy VAP but after reading what you wrote where it’s the same as VAS anyway I didn’t see a point.
I also hold a few individual company stocks.
Appreciate any thoughts you may have!
You’ve given me plenty to work with here Sammy.
First up, a couple of clarifications from my side.
VAP is not the same as VAS. They invest in different things. VAP invests in Australian Property REITS whereas VAS invests in the Australian Stock Market as a whole, but the market as a whole INCLUDES Australian Property REITS.
Clear as mud right?
VAS invests in the top 300 companies on the Australian Stock Market so it holds 300 investments.
VAP invests in the REITS that are part of the top 300 companies on the ASX, so it holds much less than 300 investments as only some of the top 300 companies in Australia are REITS.
At the time of writing there are 32 REITS in the ASX 300 so VAP invests in 32 ASX REITS compared with 300 Australian companies for VAS. Those 32 REITS are also part of the 300 companies that VAS owns.
If you own VAS, you already own everything that is included in VAP. There is not a need to add VAP to your ETF portfolio unless you specifically want to increase your holdings in Australian REITS beyond that already included in VAS.
Hope I have helped clear that up!
Next clarification is for readers who may not be aware of the tax issues you mention with VTS.
VTS continues to be domiciled in the USA. This means that Australian investors who buy VTS are exposed to US tax obligations including Estate Tax. It also means you need to regularly fill out a W8-BEN form for the IRS.
Yes that IRS!
That is why I don’t recommend VTS as an ETF to buy. You should consider investing in VGS or IVV instead.
Now onto your portfolio review Sammy.
Sam’s Australian ETF Portfolio Review
It’s good to see you started investing young. This is something you won’t regret as you grow older. Giving your investments a chance to benefit from the march of time and the power of compound interest pays off in the end.
Future Sam will thank you for your work to date.
But you definitely have a couple of double-ups going on in there!
Consolidating VHY & VAS ETFs
For starters, VHY & VAS looks like an area where you could look to consolidate your ETFs. These ETFs serve slightly different purposes so unless you have a strong reason to hold VHY, you probably don’t need to invest in it alongside VAS.
VHY aims to give a high yield return to Australian investors. It does so by focussing on companies that pay a higher dividend than average, and by excluding companies that pay a low dividend or no dividend.
Dividend investing is one strategy, but is it a good strategy?
Let me tell you the name of a company that has never paid a dividend.
Amazon. Currently worth $1.76 TRILLION dollars.
Would you want to exclude Amazon from your portfolio because it doesn’t pay a dividend?
Take a look at what companies VHY invests in:
- Commonwealth Bank
- RIO Tinto
It’s a who’s who of Australian companies right?
But these same companies are held by VAS. And VAS doesn’t exclude high growth stocks to only focus on dividends.
Unless you have a strong personal reason for holding both VAS & VHY, you probably don’t need to.
Consolidating VDHG and VAS+VGS+VGE+VAF+VBND ETFs
Next up, I see you hold VDHG as well as VAS+VGS+VGE+VAF+VBND.
This is really an either/or decision for you Sammy and another chance to consolidate your ETFs.
You can choose to invest in VDHG, which is an all-in-one diversified ETF the comes with pre-determined investment allocations to the different global markets.
Or you can choose to invest in each market individually yourself using different ETFs. In which case you would buy VAS & VGS & VGE & VBND at the allocations that are right for your individual circumstances.
Take a look at what VDHG invests in:
- Vanguard Australian Shares Index Fund (Also known as VAS)
- Vanguard International Shares Index Fund (Also known as VGS)
- Vanguard International Shares Index Fund – Hedged (Also known as VGAD)
- Vanguard Global Aggregate Bond Index Fund (Also known as VBND)
- Vanguard Emerging Markets Shares Index Fund (Also known as VGE)
- Vanguard Australian Fixed Interest Index Fund (Also known as VAF)
VDHG invests in each of these market areas so that you don’t have to! Owning both is unnecessary work if VDHG is fit for purpose for you.
Typically you would either say,
I trust Vanguard has the right allocations for me so I am going to invest in VDHG only.
Or you would say,
I need to make my own ETF allocations that suit my own individual circumstances. Vanguards’s pre-determined allocations in VDHG, VDGR, VDBA & VDCO are not right for me. I am going to invest in my own mix of VGS & VAS & VGE & VBND & VAF etc.
So Sammy, you’ve got a decision to make here. I can’t make it for you!
Either Vanguard’s all-in-one ETFs are right for you or you need to roll your own ETF portfolio.
What’s it gonna be?