ETF VDHG or VAS + VGS

Hi all, got a beginner question about etfs. I am 27 and this is the first time i'm putting money into etfs. I have bought shares and properties in the past.

My plan is either to put 100% into vdhg or 60%vas and 40%vgs.

With vdhg, i'm not sure about the bond, small company, fixed interest portion. Their management fee is at 0.27%, while VAS + VGS is (0.1+0.18)/2 = 0.14%. They do offer auto rebalance, but i guess if i do it manually, i would only rebalance once every few years anyways and with only 2 etfs, it should be very easy.

Also, i will be given the option to auto reinvest the dividends for all Vanguard etfs right?

So yeah, do you think i should go with 100% vdhg or 60% vas + 40%vgs and why.

 

I just go all in on VDHG personally - less stuffing around. Now I've just have to get out of the habit of checking how it's performing.

Cheers

Jamie

 

I'd go all 3 for diversity- I have them in my portfolio

 

VAS beats VDHG- Returns over 30yrs : AusFinance

I had a read at this and it was interesting how VAS outperforms VDHG in the past.

 

But vdhg is diversify, since it is made up of vas + vgs + bond + small etfs. I think if going for diversification, just need to buy 100% vdhg.

 

99% of your result will be dictated by sticking to your plan and savings goals and buying accordingly. Vas/vgs vs vdhg is prob the other 1%. Just make a decision and stick to it.

 

Another benefit of VDHG, currency hedging.

 

Search function will pull up plenty of excellent past discussion on VDHG. You might want to also look at unlisted wholesale versions of these funds for automated set and forget to minimise behavioural Issues that sabotage successful investing for many.

 

Your question is like saying, should I play cricket or AFL. It really depends on your circumstances.

VDHG is lower risk comprising an almost fully diversified portfolio including fixed interest and bonds. You do not need to worry about balancing - it is an all in one investment solution.

VAS + VGS is 100% equities (no bonds / fixed interest) and with 60% ASX it has a higher risk (and return) profile. In comparison with VDHG you are missing currency hedging, small caps, and emerging markets. Would that make any difference? If anyone could tell you they'd be lying as no-one really knows.

If I was to start from scratch, I would be very tempted to go with VDHG. No need to tinker or check or even think, just keep buying.

The reason to go VAS + VGS is to achieve a higher return by removing fixed interest and bonds - but you must be willing to hold for a longer period. For this option, I would add a component of Emerging markets (e.g. VGE) and Property / Infrastructure (e.g. IFRA / DJRE) and reconsider your ASX allocation.

In summary, if you want to tinker, to try to optimise your return (which is not even guaranteed), then go for a combination of VAS, VGS (IWLD for lower fees), VGE, DJRE and use cash to adjust your risk (ie the more cash you hold, the lower your overall risk). If you want to worry about other more important things in your life, buy VDHG and forget about it.

 

Thanks for this@Zenith Chaos . Should one take franking dividends into consideration as well? since VAS+VGS pay higher in franking divs? So, would these two combinations be better choice if I want to invest for income instead of capital growth?

 

Depends what your objective is and your disposition and how long you are going to be invested. Some say stay in your comfort zone, I say you extend your comfort zone. If you lean to-wards fund preservation for retirement or house deposit perhaps VDHG. But as you are only 27 and I guess investing for the long term (decades) I would have a high weighting in VGS, at least to counteract VAS 's high weighting in banks, perhaps just pick out the best company CSL, and the best bank MQG, and get a growing banks which is using more up to date technology and using capital more efficiently that are getting growth from taking the big banks market share such as MYS, if you want bank exposure. MQG does have some diversity by itself. VGS has some great companies the best in the world with great revenue earning potential. Personally I prefer to have my capital more concentrated in high conviction stocks and would invest in NDQ and some small caps that provide the software that keep the top position companies in VAS running , that are capital light, that spend money once developing and marketing their product, then just sit back and take recurring revenue from subscription. VAS has too much weighting in capital heavy banks.

 

You might find you are less diversified because your weighting will be more concentrated in some sectors. You pay a manager to fine tune and get the perfect balance for your wanted objective than you undo it. You need to decide if you are Arthur or Martha.

 

VAS+VGS has higher growth, dividends (both franked and unfranked), and risk.

 

Risk as in permanent capital loss or high volatility?

cheers
Oracle

 

Risk as in Beta aka volatility, which could easily become permanent capital loss with an unfortunate buying and selling strategy. But high risk for equities doesn't equate to permanent capital loss if one holds and takes the market return over a long enough time, which has only ever grown. Risk equates to the potential for large perturbations in the short term or a larger likelihood of an unexpected change.

The way to ensure permanent capital loss is keep your money in cash - you will slowly and steadily lose money against inflation.

VDHG keeps a bit of fixed interest and Bonds to reduce the portfolio risk, but as the time in market approaches infinity VAS + VGS has a better return aka Alpha.

What this means is if you may need the money in less than 7-10 years then don't invest in equities. Conversely, whatever you definitely do not need in 7-10 years can and should be invested 100% in equities.

 

I’ll provide the link if I can find it, but there was research from A Wealth of Commonsense (I think) showing that even the small allocation to bonds in funds like VDHG has a minimal effect on growth, but a considerable effect on volatility.

If you check out the very cool site Portfolio Visualizer you can see the effect in action.

 

I wonder whether this trade-off changes with bond yields so low. So in the past few decades, with much higher yields, maybe bonds weren't such a drag vs expected stock returns, but helped smooth fluctuations.

Is that still the same with 1-2% bond yields, given expected returns for bonds is simply the yield? Does that still mean bonds dampen volatility without much drag? Or is the expected drag larger now?

I have NFI, but maybe others can discuss

 

@Snowball

Here's VGB (Government backed bonds) price growth only over 1 year and 5 year respectively, I chose a simple LIC such as BKI just for illustrative purposes only





Here's a different snapshot vs ASX200 over 2 years showing total return ogf you had invested $9,993.06 on 30 Jan 2018 (price and coupon/interest)

 

Of course short term there can be decent moves in price. I was referring to long term expected bond returns (which tend to approximate starting yield), not short term. As highlighted by Ben Carlson in this post - What the 2020s Will Look Like For the Markets - A Wealth of Common Sense

So, starting today and looking out 10+ years, could bonds be more of a drag than they have in the past (while still doing their job as a volatility dampener)?

 

No idea what the future holds @Snowball

The plan is to zig when the markets zag, should the market take a dip the bonds will be the parachute

The returns on my ETF bonds include both interest and capital appreciation. If interest rates fall again the capital appreciation will increase. Over recent times my Aussie bond fund has done well with price growth, however if rates begin to rise over the next ten years this trend will reverse but yield from new bonds should increase

Vanguard's global outlook 2020 Link

• "...our expected return outlook for U.S. equity over the next decade is centered in the modest 3.5% –5.5% range"
• "..the U.S. fixed income return outlook for the next decade has been revised downward from last year’s projections, to 2% – 3%"

BlackRock Investment Institute's Capital Markets Assumption

• 6.1% nominal (non-inflation-adjusted) mean expected return for U.S. large-cap equities over the next decade;
• 6.5% for European equities;
• 7.5% for emerging-markets equities;
• 1.7% for the aggregate bond market (September 2019)

Morningstar Investment Management's outlook

• 1.7% 10-year nominal returns for U.S. stocks;
• 2.1% 10-year nominal returns for U.S. bonds (Dec. 31, 2019).