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Vanguard launches diversified ETFs on ASX

ETF Watch - Nov 23, 2017

Vanguard Investments, one of the biggest ETF providers in the world yesterday launched four new ETFs. These new ETFs are not accessing new investments or markets, rather they are packaging up bundles of their existing ETFs into single diversified options, allowing investors to access diversification through a single share market trade.

What are the these new ETFs?

For a long time investors have been able to access Vanguard’s range of diversified unlisted managed funds by investing direct with Vanguard.  Without the simplicity of buying and selling of ETFs (you still need to fill out an application form), and reasonably high management fees of 0.90% pa, many investors preferred to create their own diversified ETF portfolios.

That changed yesterday with the launch of Vanguard’s diversified managed funds as ETFs. Vanguard are offering four ETFs:

All of the above ETFs are offered at a 0.27% pa management fee, significantly lower than their unlisted equivalents of 0.90% pa. All ETFs offer quarterly distributions with distribution reinvestment available.

How are they invested?

All funds are invested in a mix of up to 8 Vanguard funds, 6 of which are also available as ETFs. They have a strategic asset allocation to each investment, with the ability to invest in a fairly small range around that allocation, presumably to avoid excessive rebalancing of the portfolio. The Conservative option has a 30% allocation to growth assets, Balanced a 50% allocation, Growth a 70% allocation and High Growth a 90% allocation.  The specific strategic allocations of each investment can be found below:

Why diversified investments?

Finance and Economics graduates would be familiar with Modern Portfolio Theory, the basis for the diversified portfolios you see here. Hypothesised by Harry Markowitz in 1952, it states that investors can construct portfolios to optimise their returns and reduce their risk by investing in a portfolio of investments rather an a single or limited investments. 

To maximise the return for a given level of risk, the investments should have differing characteristics to one another. This can be achieved in two ways, by investing in diversified portfolios within a sector. Traditional ETFs do this well by investing in diversified portfolios at a low cost. Portfolios diversified across sectors add a second level of diversification to portfolios with different sectors expected to perform at different times.

Investors in these diversified ETFs will have exposure to thousands of different investments, meaning whilst not expected to shoot the lights out, the risk across these portfolios will be minimised.

Which one should I pick?

This depends on your risk tolerance, investment timeframe and goals you wish to achieve from your investments. Generally as you move a higher amount of funds to growth assets, you should expect better long term returns, but greater short term volatility. These should all be considered long term investments, if you need access to your funds in the short term most would suggest leaving your money in cash.

How does the price stack up?

At 0.27% pa, there’s no doubt these ETFs are well priced. As we mentioned earlier they are priced significantly lower than their unlisted managed funds. Some time ago we took a look at the lowest cost diversified ETF portfolio available on the ASX, by replicating a similar managed fund portfolio from another Australian fund manager. At that time the lowest cost portfolio was priced around 0.21%-0.27% pa. This is slightly less than the new Vanguard options, but not by a significant amount considering the brokerage costs of purchasing and rebalancing individual ETFs, compared to accessing these new funds through a single share market trade.

Whilst the Vanguard portfolio cannot be directly replicated on the ASX, with the Vanguard Cash Plus Fund and Vanguard International Small Companies Index Fund not available as ETFs, if these funds were swapped out for some equivalent ETFs offered by alternate providers, the Vanguard portfolio could be purchased individually for around 0.18% to 0.19% pa. At a less than 0.10% saving, this difference will surely be lost in increased brokerage fees.

What’s the minimum investment?

As with all ETFs, there’s no minimum investment for these diversified ETFs, however most brokers have a $500 minimum trade amount. Investors will need to pay their share broker brokerage fees which are generally $10-$20 per trade. As a result, investors with only small sums to invest may wish to build up their investable funds before investing.

Anything else to consider?

These ETFs will regularly rebalance to align back to their benchmark allocations. Because of this investors may experience higher distributed capital gains than a single sector ETF. Investors on high tax brackets should be aware of and consider this.

These ETFs are brand new and are currently thinly traded. Whilst Vanguard’s market makers are generally great at creating a market for their ETFs with a low spread, it will take some time for a secondary market to develop and a large amount of market orders to be made available. Because of this, investors should consider placing trades with a limit order, ensuring the market maker has sufficient time to create new units when purchasing. 

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