The pros and cons of investing in the Vanguard Diversified High Growth Index ETF (VDHG)

Is excellent diversification all that it's cracked up to be?

| More on:
A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Vanguard Diversified High Growth Index ETF (ASX: VDHG) is one of the most diversified exchange-traded funds (ETF) on the ASX. In this article, I'm going to look at some of the positives and negatives of the VDHG ETF.

For readers who don't know what this ASX ETF does, it's invested in a number of other Vanguard funds, across shares and bonds.

Positives

At the end of July 2023, these were the weightings to the growth/share funds:

  • Australian shares (35.7%)
  • International shares (26.5%)
  • International shares (hedged) (16.2%)
  • International small shares (6.6%)
  • Emerging markets shares (5%)

That's a total of 90% allocated to shares across the world within the VDHG ETF. The other 10% is invested in bond funds:

  • Global bonds (7%)
  • Australian bonds (3%)

For people who like investing to be as simple as possible, this could do quite well at ticking the box because of the diversification the fund offers. We can invest in just this one ETF and get an allocation to ASX shares, larger international shares, smaller international shares, shares listed in emerging markets, as well as local and global bonds.

One could say the percentages of the allocations should be different between the markets, but this is what Vanguard has gone with.

To me, it's a good thing the VDHG ETF is largely invested in shares because, over time, I think shares are capable of producing stronger returns than bonds.

For all of this diversification, it has a pretty low annual management fee of 0.27%.

Returns since the COVID-19-hit year of 2020 have been solid. In the three years to July 2023, the ASX ETF has achieved an average return per annum of 10.4%.

Negatives

The VDHG ETF's diversification is so widespread that its returns have probably led to underperformance compared to other ETFs based just on shares that an investor could have gone with. Certainly, there has been an opportunity cost.

Over the past five years, the VDHG ETF has only returned an average per annum of 7.8%. That compares to an average return per annum of 11.5% for the Vanguard MSCI Index International Shares ETF (ASX: VGS) and 19.5% for the Betashares Nasdaq 100 ETF (ASX: NDQ) over the past five years.

Of course, past performance is not a guarantee of future performance (or outperformance). But I think it shows the ETFs that are just focused on larger international shares have done better than other forms of shares and assets.

It's not the cheapest ETF out there either. As an example, the VGS ETF has an annual management fee of 0.18% and the Vanguard Australian Shares Index ETF (ASX: VAS) has an annual management fee of 0.07%.

Foolish takeaway

It's a solid option for a set-and-forget strategy, but I'd say there are other options that can provide better returns, are higher quality, and/or have lower management fees.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Nasdaq 100 ETF and Vanguard Msci Index International Shares ETF. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF. The Motley Fool Australia has recommended Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ETFs

a man with a wide, eager smile on his face holds up three fingers.
ETFs

3 ASX ETFs to buy and hold for 10 years

Looking to make long term investments? Then check out these ETFs.

Read more »

ETF spelt out with a rising green arrow.
ETFs

Invest $5,000 into these ASX ETFs this week

These ETFs could be great options for investors with money to put into the market.

Read more »

A bemused woman holds two presents of different sizes and colours and tries to make a choice.
ETFs

Are Westpac shares or Vanguard Australian Shares High Yield ETF (VHY) units a better buy?

Is a major bank or a high yield fund a stronger choice?

Read more »

A happy elderly couple enjoy a cuppa outdoors as the woman looks through binoculars.
ETFs

1 excellent ASX ETF I'd buy for the ultra-long term

Just investing in great shares could lead to strong outcomes.

Read more »

a diverse groups of about twenty people stand together in a crowd staring to the front with angry and annoyed looks on their faces.
ETFs

These are the most popular ASX ETFs that Aussies are buying in 2024

Let's see which ETFs are popular among local investors in 2024.

Read more »

Man holding fifty Australian Dollar banknote in his hands, symbolising dividends, symbolising dividends.
ETFs

Invest $3,000 into these ASX ETFs next month

Here's what sort of stocks you would be buying with these ETFs.

Read more »

The letters ETF sit in orange on top of a chart with a magnifying glass held over the top of it
ETFs

3 excellent ASX ETFs to buy for 2025

These ETFs are highly rated by analysts. Here's what you need to know about them.

Read more »

Four young friends on a road trip smile and laugh as they sit on roof of their car.
ETFs

4 popular ASX tech ETFs smashing new all-time highs today

Do you own any of these lucky ETFs?

Read more »