The Vanguard Australian Shares Index ETF (ASX: VAS) stands as the largest exchange-traded fund (ETF) in terms of fund size on the Australian Securities Exchange. Geared towards tracking the S&P/ASX 300 Index (ASX: XKO), which represents the 300 largest businesses on the ASX, the VAS ETF becomes a focal point for investors seeking growth opportunities. In this exploration, we assess the potential of VAS as an option for Australian Securities Exchange (ASX) growth investors.
Dual Avenues for Returns: Dividends and Capital Growth
Investors typically derive returns through dividends and capital growth. While some companies focus on paying dividend on stocks, others prioritize share price appreciation for returns. The VAS ETF, mirroring its underlying holdings, reflects the performance of businesses constituting the S&P/ASX 300 Index. A key consideration for growth investors is whether the ETF aligns with their objectives of capital growth.
Weighing Influential Holdings in the VAS Portfolio
Examining the VAS portfolio’s major positions with a weighting of more than 3% as of December 31, 2023, sheds light on the sectors shaping the ETF’s performance:
- BHP Group Ltd (ASX: BHP) – 11%
- Commonwealth Bank of Australia (ASX: CBA) – 8.1%
- CSL Ltd (ASX: CSL) – 6%
- National Australia Bank Ltd (ASX: NAB) – 4.1%
- Westpac Banking Corp (ASX: WBC) – 3.5%
- ANZ Group Holdings Ltd (ASX: ANZ) – 3.5%
Notably, mining and banking emerge as prominent sectors within the ASX, influencing the composition of the VAS ETF. However, the challenge lies in the growth potential of these massive businesses, as doubling the market capitalization becomes increasingly challenging.
Growth Constraints in Mining and Banking Sectors
The dominance of mining and banking stocks in the VAS ETF raises questions about sustained growth. The four major ASX bank shares wield substantial market share, but the sheer scale of their operations may hinder robust profit growth. With intense competition in the lending space, achieving solid compounding profit rates becomes a formidable task. While these entities offer sizable dividends, their capacity for continuous profit expansion is a subject of scrutiny.
Similarly, mining shares like BHP within the VAS ETF are tethered to commodity prices, subject to cyclical fluctuations. Relying on consistent production increases may adversely impact commodity prices, thereby impacting profitability. The resource business’s ability to maintain perpetual growth raises concerns, particularly as commodity prices undergo predictable cycles.
Select Businesses Offering Growth Potential
While the VAS ETF includes companies with growth challenges, some outliers exhibit promising profit growth. CSL, Aristocrat Leisure Limited (ASX: ALL), and WiseTech Global Ltd (ASX: WTC) represent businesses within the ETF displaying growth potential. However, their influence on the VAS ETF remains overshadowed by industry behemoths like BHP and major banks.
Performance Analysis and Historical Returns
Understanding the historical performance of the VAS ETF is vital for growth-focused investors. Over the past five years, the ETF has delivered an average annual return of around 10%, with capital growth averaging 5.6% per annum. In the past decade, the total return averaged 7.8% per annum, encompassing capital growth of 3.3% per annum. These figures underscore the VAS ETF’s ability to increase in value, albeit without delivering extraordinary capital growth.
Alternative Perspectives: Global Market Focus
In contrast to the VAS ETF’s ASX-centric approach, investors seeking diversified growth opportunities may find appeal in global market-focused ETFs. The Vanguard MSCI Index International Shares ETF (ASX: VGS) exemplifies such an alternative, offering exposure to the broader global share market. While the VAS ETF maintains stability and potential growth, investors with a global outlook may explore options beyond the confines of the ASX.
Conclusion: Balancing Growth Aspirations with Realities
The Vanguard Australian Shares Index ETF (VAS) holds merit for investors seeking stability and consistent returns. However, its capacity for explosive capital growth remains constrained by the dominance of sizable but slow-growing sectors. Investors must balance growth aspirations with the realities of the ASX landscape, considering alternative ETFs for a diversified approach. The VAS ETF, while a resilient performer, may not be the sole solution for those pursuing dynamic capital appreciation in their investment journey.
