Stocks In Focus: Vanguard Australian Shares ETF, April 30 2025

0:10G'day fools and welcome to Motley Fool Stocks in Focus. I'm Scott Phillips, Notley Fool's Chief Investment Officer here in Australia. And this is our weekly video slash podcast where we look at one of the maybe more popular, more widely owned, more newsworthy companies on the ASX. And we drill it, break it down with one of our gun analysts here at The Motley Fool. Now, a reminder, if you are listening to this on the podcast, The Motley Fool Money Podcast, thank you for doing that. Make sure you hit the subscribe button so you get everything we send you out. We publish episodes three times a week these days.

0:42You don't want to miss that. But if you're on YouTube, or by the way, if you're on YouTube, you're going to go over the podcast, go and subscribe. If you're on YouTube, though, you come across this video one way or another, you have to do three things for me. You have to like the video if you wouldn't mind, if you're enjoying it. I hope you do. If you do, I hope other people find it. Then make sure you subscribe to the channel and hit that little notifications bell. Why? Because that means when we release something new, you get notified. Again, if you're not enjoying it, stop watching and go and do something else.

1:06But if you are and you want more from The Motley Fool, that's the best way to make sure you don't miss a thing on our YouTube channel. All right, that out of the way, let me introduce to you one of our gun analysts here at the Motley Fool. He's actually one of our service advisors. He is, of course, Ed Vesely. Ed, g'day. G'day, Scott. How are you going? Mate, I'm very, very well. Thank you for joining me. We're going to talk about our Motley Fool stock in focus. This time, stock, I don't use companies rather than stocks, but this time it's actually an individual company. Before I get to that, though, I want our listeners and viewers to know that whatever we do talk about in this video is general advice only.

1:39We can't give you personal advice. Also too, we're recording this one at the very end of May, April 2025. I'm already getting ahead of myself. And so if you're watching this later than that, the news may have changed, the circumstances may have changed. Just be mindful of the fact that we're commenting on an investment at a point in time. Things change, so things change. But yeah, just so you're aware of that one. Mate, as I said, it's not really a company this time around. In fact, it's a lot of companies altogether. It's the Vanguard Australian Shares ETF. Absolutely, yeah. It's actually a very popular ETF from what I've been reading online.

2:13It's recommended by advisors and even general advice places like us where we might say, well, if you're new to investing, stocks are one option. But if you really want to get your feet wet slowly, so to speak, then an option such as this Vanguard Australian Shares Index could be a good way to go. And that's because there's a very low cost structure with this one. I was quite surprised to see it sitting at 0.07%. Oh, it's 100%. So it's extremely cheap. It's practically a free investment. You're getting the portfolio of 300-odd companies. It is actually designed to track the returns of the Australian S &P ASX 300 index, but I did read in a blurb that currently, as of the end of March, there were 306 companies and REITs slash REITs in the portfolio.

3:01So it's approximately 300, very low cost, gives you a decently broad exposure to Australian listed companies and REITs, real estate investment trusts. And the other thing that I was quite surprised at when reviewing this ETF is that it does pay a pretty good dividend yield as well. So I like to focus on dividends and the current yield is just under, or just around 3.4 % and it's ranked to about 70%. So in addition to a quarterly, well, I say dividend, it's really a distribution. In addition to that, you've got also franking of around 70%. And that will vary depending on what goes on within the index itself and how it matches it.

3:40But it's actually not a bad little idea, especially for people starting out. But even for people that haven't been investing for a while, it's actually a good option for diversification on one hand and also just to provide a bit of ballast to perhaps a portfolio that could be riskier elsewhere. Nice, Wayne. Let's go back a couple of steps for me. Now, you're right, ETFs are getting really popular. In fact, we've already covered this as the second one in our rebooted Stocks in Focus series. So nice time to be talking about them and they're super popular amongst particularly young people investing, but anyone who wants that sort of investment to be added to their portfolio, to make up their portfolio.

4:15But let's kind of break it all down. Let's start with what is an ETF exactly? It's an exchange traded fund. So in the old days, and there still are some today, There are, there's actually quite a few. There's still managed funds out there. They're generally not listed. And you would actually, if you're looking to go into a managed fund, you would either go through a financial planner or you would go through the fund manager directly and pay your money after filling out a form and you'd have a certain number of units in the fund. But a lot of the money being invested these days is more passive and it's going into indexes or I should say ETFs like this one.

4:54So in this case, you'd be buying this on the exchange, on the A6 through a broker. You pay your normal brokerage fee as if you're buying any other company or REIT on the stock exchange. And you just sit back, take whatever the amount of money is that you've invested. You'll receive a number of units. And of course, they attract a distribution, as I say, each quarter. And it's just a case of sitting in, just enjoying the ride with something. I think it's not going to be very volatile because it matches the index, but it is, as it says, an exchange-traded fund. It is literally a fund, not so much managed, but it's there to just pretty much mimic the index and is done at a very low cost, with the exception is that you're not going directly to Vanguard.

5:39You're just buying it on the exchange. And that's the E in the ETF, so to speak. Nice. Let's go then to the makeup of an ETF. And particularly talk about diversification. You mentioned a one-stop shop. You mentioned getting your feet wet slowly. What are the benefits of an ETF and this one in particular? Well, this one's very good. Again, it's low cost, so I was really attracted to that. It's not going to cost you anything other than the brokerage. And if you can get T brokerage, it's basically almost free, depending on how much you've got to invest. Look, the point is it's all about diversification.

6:14Some investors could say, right, well, I'm not going to go and buy 300 stocks. I could just buy one ETF and that's fine. You could do that. What you've got to do though as a potential investor in something like this is to just go through and just to have a look and see what the makeup is. Fortunately, you can go to the Vanguard website and download a spreadsheet and you can actually see each of the 306 investments or companies in the ETF. Now, something that you've got to be aware of is that the big four banks plus Macquarie Bank or Macquarie Group, they account for just over one quarter of the total value of this ETF.

6:52So I think that reflects really, it's not so much a problem of the ETF, although it is highly concentrated from that point of view. Problem is that the Australian market is highly concentrated anyway, and so it's just doing what it's supposed to be doing. So I think when it comes to investing in something like this, you've got to say to yourself, okay, well, I can start and invest in this today and have one quarter of my money going to banks, which are, by the way, very expensive, especially when you're talking about the Commonwealth Bank of Australia, which I think was somewhere in the media, Scott, it was mentioned as the most expensive stock in the world or the most expensive bank in the world.

7:27I can't remember which, but it's not cheap. So you have to be cognizant that you're buying into a portfolio, say, of 306 different companies. A lot of these are very expensive or a lot of them don't make money and some of them are actually quite poor, but it's supposed to be a market, right? So you're buying a bit of the good stuff, the average stuff and a lot of the bad stuff as well. So keep the concentration in mind, but I think it's actually still very suitable for most people because it's a starting point. And I think even if you weren't inclined to go ahead and invest in direct shares, you could look at this particular ETF and then diversify with other sectors or even outside of Australia with the same company or with other ETF providers as well.

8:13So the fact that you've got around, I think it's about 10 % of the fund is in Commonwealth Bank by itself, that doesn't necessarily mean that you have to retain that exposure if you're going to diversify elsewhere outside of this ETF. So I would say it's more of a stepping stone into a more diversified portfolio, despite it having 306 stocks already. It's actually one investment, which I don't think you have all your money in, but it's a very good core or a good place to start with the building of a portfolio. Nice. Also, to Chris Copley, one of our colleagues, we spoke about the iShares S &P 500 ETF only two weeks ago.

8:48So, again, if you're on the podcast, if you're on YouTube, you can find that one. Scroll back through the podcast feed or look at the Stocks in Focused video playlist, it's called, I think, on our homepage, on our YouTube channel, your final, that kind of good stuff. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

9:09Mate, so you talked about what it was made up of. You talked about the fact that it's passive. In other words, someone does the stock selection based on just following an index rather than choosing their own views, their own flavor, their own color. Tell me about some of the disadvantages. Why would people not want to purchase this ETF? Yeah, there's a few things. And I guess some of these are personal to me. Personally, I'm not a fan of the ETF structure. And that's not to say anyone can invest in these things, but it's not something I've invested in myself. I guess there's a couple of points I wanted to make.

9:41The first point is that distribution tax estimates come out. Obviously, there's four distributions each year, but when you go through the distribution tax estimates that are sent to you as an investor, it shows a convoluted list of tax components which need to be accounted for in your income tax return. Now, that should be okay, I think, if you've got a financial advisor, or sorry, a tax agent who can do that for you, or there's some very good software that can actually calculate that for you. That's okay, but it is complicated. So it's not just a case of investing in say Telstra, for example, and you get two dividends a year and it's got a dividend plus ranking credits.

10:20It's really simple. Anyone could actually enter that into an income tax return. But for an ETF, and it's not just this one, it's all ETFs, I think. It's quite complicated from that point of view. And the other thing that I guess is a negative is that because it's a trust, any income that is earned has to be distributed to the unit holder. And a lot of that is realized capital gains. So if you're thinking you've got a passive investment here and you can hold it for many, many years into the future without having to pay any capital gains tax, you're actually wrong because a lot of those, well, not a lot of them, but there's actually some capital gains which are distributed back to you each year.

10:55And from that point of view, it's not very tax efficient. So I'd say they're my two biggest gripes, but if you're okay with it. I wouldn't say it's a deal breaker necessarily. You just have to be aware of it, that as part of those tax components that are coming to you, it's very likely you're going to have some realized capital gains, which will have to go into your tax return. And yes, you will have to pay tax on, but of course, you've got franking credits there to offset some of that. Nice there, mate. Nice summary. Normally, I would finish at this point and say, do you think it's going to beat the market?

11:24The funny thing about the S &P 300 is the index itself is the index. So will it beat itself is a random question. In fact, it can't beat the market by definition because if it is the market and it's charging your fee, it must lag very, very, very, very slightly. So maybe that's an easy one to answer. I guess what I'll ask you about instead is, from a long-term perspective, what sort of return should investors expect by investing in this sort of ETF? Sure. I didn't actually look at its long-term returns, but I would say if you're going to be investing, say, in the top 300 of the ASX, you should be looking at around conservatively with with income around 9 % to 10 % per annum over the long run.

12:03There will be variations. Some distributions will be high and some will be low, and you will see fluctuations. I did see a few headlines from the Motley Fool website talking about this ETF in the recent past, and there were moments where it fell 8%, but it could have easily fallen more than that or less than that. It could also jump by 5 % or 10%, just depending on what the market is doing. So I think you just have to treat something like this as just being, it is an equity investment, and you just still have to take that long-term view. But I think over the very long run, you should expect, hopefully, 9 % to 10%, including the income that comes with it.

12:34Beautiful. And I guess that's where this ETF sits, right? It's for people who realize that investing is worth doing, but don't feel like they want to pick individual stocks. You get to buy the market and benefit from the market return. You can't outperform, as I said, almost by definition. I mean, you can compare against other indices, I suppose, around the rest of the world or something else. But the reality is it's going to give you the market return less a tiny, tiny portion of fees. So the return is, by the way, no means guaranteed. That's an average, as you say. Sometimes it's good, sometimes it's bad.

12:57But the key point here is if you think you want to be invested, you don't know what to buy or you think you want to diversify your own portfolio and some diversification by buying an ETF, that's kind of the role of this sort of investment, right? Absolutely. And look, I was saying, look, I've mentioned a couple of the drawbacks there. I think the drawbacks overall are quite minor. But the main thing is, is that for someone who's watching this who hasn't started investing yet, this is a very good place to start. And I would say, don't worry about tax and all that sort of thing. Just get invested.

13:25Take a long-term view with equities and you will reward yourself over time. And of course, it'll build your confidence towards investing in other things. So you could extend that to other exchange-traded funds as well. And beyond that, if you're getting more confident again, you can look to buying shares directly. Beautiful. Lovely summary, Ed. Thank you for sharing this particular ETF with this particular investment with us and stocks in focus. It is the Vanguard Australian Shares ETF. F tracks the ASX300, and the code is ASXVAS. As always, the obvious can change in time, but at the moment, and I imagine for a foreseeable future, maybe even longer than that, this will be a staple of many, many portfolios for very justifiable reasons, as you say.

14:06Hey, thanks for showing your expertise with us. Thanks for watching. Thanks for listening to Motley Fool Stocks in Focus. We'll be back the same time next week with another one, another analyst from our team. In the meantime, thanks for watching. Thanks for listening, and Fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.