Should ASX growth investors buy the Vanguard Australian Shares Index ETF (VAS)?

Can the most popular ASX ETF deliver good capital growth?

| More on:
Woman on her laptop thinking to herself.

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 Australian Shares Index ETF (ASX: VAS) is an exchange-traded fund (ETF) that focuses on the S&P/ASX 300 Index (ASX: XKO), representing 300 of the biggest businesses on the ASX. Can the VAS ETF, the biggest ETF in terms of fund size, be a good option for ASX growth investors?

There are two main ways for investors to make investment returns: dividends and capital growth.

Some companies don't pay any dividends at all, so any returns from those businesses need to come from share price increases. Names like Xero Limited (ASX: XRO), Berkshire Hathaway, Alphabet, Amazon.com come to mind.

A company can see its share price rise over time and deliver dividends, such as Sonic Healthcare Ltd (ASX: SHL), Altium Limited (ASX: ALU) and Brickworks Limited (ASX: BKW).

Can Vanguard Australian Shares Index ETF (VAS) fit the bill for ASX growth share investors?

The performance of the VAS ETF simply tracks the performance of its underlying holdings. The bigger the allocation to a holding, the more influence it has over the VAS ETF's performance.

Looking at the biggest positions in the portfolio, these are the ones with a weighting of more than 3% as of 31 December 2023:

  • 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%

As we can see, mining and banking are two key sectors for the ASX.

The tricky thing is that they're such huge businesses in market capitalisation terms that it becomes very difficult to keep delivering growth. It's much easier to double a $1 billion business to $2 billion than it is to go from $100 billion to $200 billion.

The big four ASX bank shares have a huge market share, and I'm not sure they can grow profit at a solid compounding rate from here, considering there is so much competition in the lending space willing to accept very low returns. However, they continue to pay big dividends.

BHP (and other ASX mining shares) in the VAS ETF are highly reliant on good commodity prices to make good profit. Commodity prices don't keep increasing year after year – they usually go through cycles. Miners can increase their production, but it's unsustainable to think the resource business can keep producing more and more. If production does keep rising, it could hurt the commodity price.

My point is that the ASX is full of the sorts of companies that aren't likely to see strong profit growth year after year. Investors usually judge a business based on how much profit it's making, so the share price isn't likely to rise strongly if the profit isn't rising.

There are some businesses within the VAS ETF that are doing better at growing profit, such as CSL, Aristocrat Leisure Limited (ASX: ALL) and WiseTech Global Ltd (ASX: WTC). But, they don't have as much influence on the VAS ETF as BHP and the ASX bank shares.

Past performance

ASX growth share investors need to know that while the VAS ETF has delivered an average return per annum of around 10% over the past five years, its capital growth has been 5.6% per annum. In the past decade, the total return has been an average per annum of 7.8%, which included capital growth of 3.3% per annum.

I think the VAS ETF can keep increasing value, but it's not going to shoot the lights out when it comes to capital growth. I'd rather go for an ASX ETF that's focused on the global share market, such as Vanguard MSCI Index International Shares ETF (ASX: VGS).

Motley Fool contributor Tristan Harrison has positions in Altium and Brickworks. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Brickworks, CSL, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended Brickworks, WiseTech Global, and Xero. The Motley Fool Australia has recommended CSL, Sonic Healthcare, and 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 Opinions

Two happy woman on a couch looking at a tablet.
Opinions

Why I'm excited to see the results of these ASX 200 shares

These stocks could reveal very interesting insights.

Read more »

Young male investor smiling looking at laptop as the share price of ASX ETF CRYP goes higher today
Opinions

Why I just bought this 5.2%-yielding ASX dividend stock and plan to buy even more

This business is one of my favourites for dividends and total returns.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
Opinions

Why I'm still investing in ASX shares during tariff uncertainty

There are a few reasons why I plan to continue investing even during uncertainty.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Opinions

Why I'm buying more of these 2 ASX stocks ahead of earnings season

I've been excited about buying these investments.

Read more »

Business women working from home with stock market chart showing per cent change on her laptop screen.
Opinions

1 month until ASX earnings season begins: how I'm preparing

It’s almost reporting time. Here’s what I’m looking at.

Read more »

a man sits at his desk wearing a business shirt and tie and has a hearty laugh at something on his mobile phone.
Opinions

Potential buys: 2 compelling ASX shares I like

These ASX shares have an exciting future.

Read more »

Smiling man at the wheel of a car.
Opinions

2 ASX auto stocks to buy — and 1 to sell: experts

Analysts have shared fresh insights into 3 ASX auto shares -- and not all of them are in the buy…

Read more »

A male investor sits at his desk pondering at his laptop screen with a piece of paper in his hand.
Opinions

ASX retail share whose 'fundamentals have deteriorated significantly': expert

Christopher Watt from Bell Potter explains his views on this former market darling.

Read more »