ETF Portfolios

I designed this portfolio with regard to my individual financial situation and opinions.

Let me highlight what makes this portfolio mine:

1. I only want exposure to the Australian market relative to it’s global market share

The Australian share market represents only 2% of the global share market value. If I invested 50% of my portfolio into the ASX then Australian shares would be 25 times over represented in my portfolio.

This is a phenomenon known as ‘home bias’.

There is nothing wrong with having a home bias. But it doesn’t suit my individual circumstances when you consider that:

2. I am an Australian Expat and spend considerable time and money overseas

I earn money in USD.

I spend money in USD, EUR, GPB, CFA – you name it!

Therefore I need to have more exposure to international equities than your average Australian who lives, works and spends in Australia.

So why not go with a ready made Vanguard Growth portfolio?

Well, besides the fact that none of Vanguard Australia’s ETF Portfolios align with my stated objectives above:

3. I want to have control over my Asset Allocation

I am a tinkerer.

I want to be able to make changes to my allocations based on my research and I want to increase my allocation to income as I age.

…and approach early retirement!

I don’t want to rely on a portfolio that is made for Joe Bloggs – I want a portfolio made specifically for ETF Bloke!

My ETF Portfolio

Growth – 70%

• 58% in VGS
• 5% in IJR
• 5% in VGE
• 2% in VAS

Income – 30%

• 21.5% in VBND
• 5% in VAF
• 3.5% in AAA

Now that you know what is in my portfolio it is time for you to learn how to create your own Australian ETF Portfolio.

This portfolio provides you with 100% exposure to the Australian market and 0% exposure to foreign markets (well, almost)

• 70% VAS
• 30% VGB

Aussie Aussie Aussie. Oi oi oi.

This portfolio might be for you if:

• You don’t care about exposure to international markets beyond Australian companies that make their money overseas
• You spend all your time and money in Australia and have no plans of changing that
• You consider franking credits to be God’s gift to financial markets

Conservative, Balanced, Growth, High Growth. You might be familiar with these terms from your Superannuation fund.

These words are not specific to Super.

Vanguard also constructs their index fund portfolios according to a Conservative, Balanced, Growth, High Growth investment allocation.

Better yet, Vanguard publicly publishes the holdings of their index fund portfolios.

However Vanguard’s Index funds attract higher fees than building a portfolio from their ETF counterparts.

What I will show you in this post is how to construct your own Vanguard Australia ETF Portfolio based on the information that Vanguard publishes about their index fund portfolios.

This will allow you to draw on the expertise of Vanguard’s fund managers without paying the Vanguard index fund management fees!

If you are short on time, jump straight to the ETF portfolio that you are interested in to see what the Asset Allocation should be:

• Vanguard Australia Conservative ETF Portfolio
• Vanguard Australia Balanced ETF Portfolio
• Vanguard Australia Growth ETF Portfolio
• Vanguard Australia High Growth ETF Portfolio

Asset Selection

Each of Vanguard’s Index Funds invests in a mix of different asset classes.

Below I have listed the various Vanguard ETF’s that are on offer alongside the corresponding Vanguard Australia Index Funds.

There is no difference between the investment holdings of the ETF and Index Fund. They are two different ways of investing in the same set of assets.

ETF’s are simply easier and cheaper ways to invest than Index Funds.

Growth

• VAP = Vanguard Australian Property Securities Index Fund
• DJRE = SPDR Dow Jones Global Real Estate Fund
• VAS = Vanguard Australian Shares Index Fund
• VGS = Vanguard International Shares Index Fund
• VGAD = Vanguard International Shares Index Fund (Hedged)
• IJR = Vanguard International Small Companies Index Fund
• VGE = Vanguard Emerging Markets Shares Index Fund

Income

• VAF = Vanguard Australia Fixed Interest Fund
• VIF = Vanguard International Fixed Interest Index Fund (Hedged)
• VCF = Vanguard International Credit Securities Index Fund (Hedged)

Vanguard Australia’s ETF Portfolios

The Conservative, Balanced, Growth and High Growth Vanguard portfolios all invest in the same asset classes.

What differs between each portfolio is the Asset Allocation.

The Conservative Portfolio is allocated:

• 70% Income
• 30% Growth

Whereas the High Growth Portfolio is allocated;

• 10% Income
• 90% Growth

The Balanced and Growth portfolios are inbetween.

If you are close to retirement age you will want to maximise the Income you receive and will be less interested in future capital growth.

Therefore you would focus on investing with a Conservative Portfolio asset allocation.

Alternatively if you are a recent uni graduate you will want to take advantage of compound growth over the years ahead of you.

Therefore you would focus on investing with a High Growth asset allocation.

Let’s cut to the chase and review Vanguard Australia’s ETF Portfolios.

Vanguard Australia Conservative ETF Portfolio

High Level Asset Allocation

• 70% Income
• 30% Growth

Conservative Portfolio Asset Allocation

The Vanguard Australia Conservative Index Fund portfolio looks like this:

Income = 70%

• 10% in Cash
• 18% in VAF
• 42% in Vanguard Global Aggregate Bond Index Fund

Note: Vanguard’s Global Aggregate Bond Index Fund is new on the market as of 1 July 2017. There is no equivalent ETF at the moment. I recommend investing in a mixture of VIF & VCF as a proxy until such time that Vanguard launches the equivalent ETF on the ASX.

Growth = 30%

• 12% in VAS
• 8.5% in VGS
• 5.5% in VGAD
• 2% in IJR
• 2% in VGE

Vanguard Australia Balanced ETF Portfolio

High Level Asset Allocation

• 50% Income
• 50% Growth

Balanced Portfolio Asset Allocation

Income = 50%

• 15% in VAF
• 35% in Vanguard Global Aggregate Bond Index Fund

Growth = 50%

• 20% in VAS
• 14.5% in VGS
• 9% in VGAD
• 3.5% in IJR
• 3% in VGE

Vanguard Australia Growth ETF Portfolio

High Level Asset Allocation

• 30% Income
• 70% Growth

Growth Portfolio Asset Allocation

Income = 30%

• 9% in VAF
• 21% in Vanguard Global Aggregate Bond Index Fund

Growth = 70%

• 28% in VAS
• 20.5% in VGS
• 12.5% in VGAD
• 5% in IJR
• 4% in VGE

Vanguard Australia High Growth ETF Portfolio

High Level Asset Allocation

• 10% Income
• 90% Growth

High Growth Portfolio Asset Allocation

Income = 10%

• 3% in VAF
• 7% in Vanguard Global Aggregate Bond Index Fund

Growth = 90%

• 36% in VAS
• 26.5% in VGS
• 16% in VGAD
• 6.5% in IJR
• 5% in VGE

Creating your own Vanguard ETF Portfolio

Now comes the clever part.

With this portfolio you ‘borrow’ the asset allocation published by Vanguard but go ahead and purchase the ETF’s yourself rather than investing directly in Vanguard’s managed funds.

This portfolio might be for you if:

• You accept that Vanguard’s fund managers (who are responsible for billions of dollars of investment funds) might know slightly more than you do about this portfolio management game
• You grew up in the time of Napster and BitTorrent and resent paying for things that others produce

Highly Intelligent, Low cost… Morally Questionable?

The Lazy Portfolio is the Australian version of an ETF portfolio made famous by Paul B. Farrell.

Paul could well have been a closet Australian having written a book titled ‘The Lazy Person’s Guide to Investing’.

Maybe I should have called this one the Laid Back Portfolio to make it more Aussie.

Anyway…

The portfolio made famous as the Lazy Portfolio is also known as the Three Fund portfolio.

It doesn’t take a rocket surgeon to understand where these nicknames come from when you dive a little deeper into the portfolio allocation.

Features of a Lazy Portfolio

Your typical Lazy portfolio is made up 3 ETFs with the asset allocation split evenly between all three funds.

• Take 3 ETFs
• Allocate 33% to each ETF

And that’s your asset allocation done!

No really. That is all there is to it.

The seppos version of the 3 fund portfolio invests as follows:

• 33% in Total Stock Market Index
• 33% in Total International Stock Market Index
• 33% in Total Bond Market Index

Or written for mere mortals to understand:

Invest one-third in US Stocks, one-third in International Stocks and one-third in Bonds.

Now when you translate that into Aussie ETF speak the Australian Lazy Portfolio looks like this:

• 33% invested in VAS (Australian Stocks)
• 33% invested in VGS (International Stocks)
• 33% invested in VGB (Bonds)

Straightforward enough.

Reasons to invest in the Australian Lazy Portfolio:

Lazy portfolios are diverse yet simple

• You can invest in the total universe of stocks and bonds by buying only 3 ETFs.

It is easy to re-balance your asset allocation

• Do you have the same amount invested in all 3 ETFs? No?
• Then make it so

Frugality: These 3 ETFs are very low cost

• Management fees per annum are 0.173% for this 3 fund portfolio
• That’s $1.73 per $1,000 invested

Maybe you are just getting started on building your own Australian ETF Portfolio. Or maybe you aren’t satisfied with the complexity of your existing ETF Portfolio.

If so then the Australian Lazy Portfolio might be just what you are looking for.

The Australian Lazy Portfolio will give you a simple, diverse and low cost ETF portfolio.