Vanguard ETFs show the power of diversification
One of the constants in investing is that investment returns are never constant. Take the 2020-21 financial year for example. After falling heavily during the COVID-19 market crash in the early part of 2020, global share markets rebounded to near record levels by the end of June this year.
And returns from different investment sectors can also show big variations from year to year for a range of reasons. After recording a negative return in 2019-20, the Vanguard Global Value Equity Active ETF (Managed Fund) (VVLU) produced an almost 50% gain in 2020-21. The huge rebound was fuelled as many investors shifted their focus towards listed companies perceived to be trading below their intrinsic market value.
Likewise, there was a big turnaround by the broader Australian share market. It gained around 30% last financial year after a loss of 7% the year before. This is why a growing number of Australian investors, either directly or through a financial adviser, are choosing diversified exchange traded funds (ETFs) as a way of offsetting ongoing market volatility over the longer term.
Related article: Highest Return ETFs in Australia in 2021
Taking a diversified approach
Rather than being exposed to just one asset class, market or sector, diversified ETFs invest across multiple asset classes in a single product. They do this by investing in a combination of funds, which invest in a mix of asset types, markets and sectors. Investing across a range of different types of investments can help to smooth out volatility.
More than $700 million flowed into Vanguard’s diversified ETFs over the first half of 2021, and momentum has continued to accelerate since 30 June as global share markets hit record highs. A key advantage of diversified ETFs is that they give investors the option of having higher or lower exposures to different assets, such as shares and bonds, depending on their individual tolerance for risk.
The diversified ETFs are versatile products that can be used as an all-encompassing single product portfolio, or as an extremely well diversified core building block with ‘satellite’ exposures around the edges. Diversified ETFs can help investors maintain a more disciplined approach to portfolio management, avoiding regular switches into and out of various assets. This allows them to have a more consistent risk profile, no matter how markets move.
Another advantage is that they’re cost effective compared with the fees involved in buying and managing the asset allocations of multiple ETFs or individual investments. Vanguard has four diversified ETFs which have been designed for investors seeking either conservative, balanced, growth or high growth asset allocations. Each fund invests across seven to eight different funds, covering all of the major asset classes, to provide broad diversification.
Related article: Are you failing the diversification test?
Booming global share markets have boosted the returns from most funds with high exposures to shares over the last year.
The Vanguard Diversified High Growth Index ETF (VDHG) – with 90% of its investment exposure in shares and 10% in lower-risk fixed income assets – achieved a total return of 26.96% over the year to 30 June. VDHG has experienced the largest diversified product investment inflows over 2021, with its total funds under management increasing by 65% over the first half of this year to more than $1.1 billion. Over the last three financial years it has achieved an average total return of 11.34% per annum.
The next-highest diversified funds increase of 20.31% over 2020-21 was recorded by the Vanguard Diversified Growth Index ETF (VDGR). With a 70% exposure to shares and 30% in fixed income, it has achieved a three-year return of 9.90% per annum.
Vanguard’s top performing ETFs
The Australian, United States and other developed international share markets all recorded gains of around 30% last year. International shares hedged into Australian dollars gained 37.1%. But a clearer picture of annual performance can be seen with a three-year total performance lens. It shows that the strongest performances were from the U.S. and international share markets over each of 2018-19, 2019-20 and 2020-21.
In terms of Vanguard ETFs, the best three-year return has been from:
- Vanguard US Total Market Shares Index ETF (VTS) 18.57%
- Vanguard MSCI Index International Shares ETF (VGS) 15.16%
- Vanguard MSCI Australian Small Companies Index ETF (VSO) 12.15%
Over this period, VTS has achieved a return of 18.57% per annum. The ETF invests across more than 3900 U.S. companies, with its highest sector exposures to technology, consumer discretionary, industrials and health care. It includes sectors that are not well represented on the Australian share market, providing diversification for those wanting to move away from a home-country bias.
Next highest has been the Vanguard MSCI Index International Shares ETF (VGS), which has returned 15.16% per annum over the last three financial years. The fund provides exposure to approximately 1500 of the world’s largest and most tradeable companies listed in developed countries, excluding Australia. VGS has received the second-most inflows for all ETFs in Australia this year to July, behind the Vanguard Australia Shares Index ETF (VAS).
The third-best three-year performance has been from the Vanguard MSCI Australian Small Companies Index ETF (VSO).
VSO provides a diversified exposure to about 200 small companies listed on the ASX. Over the three years to 30 June it achieved a total return of 12.15% per annum, outperforming the broader Australian share market (9.68% per annum total return) over the same period.
The long-term view
It’s only when you take a long-term view of the performance of markets over time that you get to see the bigger investment picture. The 2021 Vanguard Index Chart shows the power of perspective. And it demonstrates that while markets do experience volatility and can sometimes fall quite sharply over short periods, they consistently rise over longer time frames.
Investors who stay the course, rather than trying to time when to buy and sell, tend to be more successful in the long run. If you invest in products such as ETFs and managed funds that provide broad exposures to markets, you are well positioned to capture the rising returns from those markets over time.
Cover image: Wright Studio/Shutterstock.com
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Tony Kaye is Senior Personal Finance Writer at Vanguard. He was a former manager at Standard & Poor’s Ratings and has a regular column in the Australian’s Wealth section. Tony has also written for newspapers nationally; The Telegraph, The Herald-Sun, The Advertiser, The Courier-Mail, NT News, Canberra Times and more. He has a Bachelor of Arts and Journalism at Curtin University and Public Relations at RMIT University.
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