Young & Invested: The best Aussie ETFs
See how the two popular options compare.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 16
With most Aussies now holding at least one ETF in their portfolio, it’s a hard proposition to ignore for beginner investors. Offering instant diversification across a basket of securities at a reasonably low cost, their popularity is unsurprising.
In a previous edition of my column, I went through the beginner ETF portfolio and discussed what that may look like in practice. Today i’m exploring the Australian equity ETF market and comparing two investor favourites in this category.
ETF investors on the rise despite market volatility
Vanguard reported that Aussie investors added over $11 billion of inflows into ASX-listed ETFs over the first quarter of 2025.
Vanguard Australian Shares ETF (ASX: VAS) and BetaShares Australia 200 ETF (ASX: A200) were standouts with the two respectively recording the highest domestic equity ETF inflows in Q1 of 2025.
Their popularity has remained consistent with both experiencing some of the largest ASX ETF net flows over 2024.
Most popular ETFs by net flows. Source: Global X Australian ETF Market Scoop. 2024.
As the most popular ETFs used for Australian equity exposure, the two can appear indistinguishable on the surface, however when analysed closer have some points of deviation for investors.
Vanguard Australian Shares ETF (VAS) vs BetaShares Australia 200 ETF (A200)
Purpose
Both the VAS and A200 ETF track an index meaning they are passively managed.
VAS’s strategy aims to fully replicate the ASX 300, a free-float-adjusted, market-cap-weighted index. The ASX 300 covers ~87% of Australian equity market capitalisation.
On the other hand, A200 ETF tracks the lesser known Solactive Australia 200 Index. Whilst niche, there is little to separate this benchmark from the ASX 200. Investors seeking the familiarity of better-known benchmarks will find negligible differences between the two. The Solactive Australia 200 Index covers ~80% of Australia’s equity market.
Both ETFs are driven by market-cap weighted methodologies, however VAS has exposure to an additional 100 companies. The two are notably popular with investors for providing a cost-effective option for investors seeking broad exposure to the Australian equities market.
Morningstar Medalist Rating
The Morningstar Medalist Rating is a forward-looking analysis that aims to predict funds’ performance versus a relevant benchmark index or peer group. The three pillars of people, process and parent are used to evaluate ETFs.
Morningstar expresses the Medalist Rating on a five-tier scale running from Gold to Negative. Higher ratings denote our conviction in a fund’s ability to outperform and lower ratings indicating a lack of conviction.
The top three ratings of Gold, Silver, and Bronze all indicate that our analysts expect the investment vehicle to add value or “positive alpha” over the long term when compared with a relevant category index after accounting for fees and risk. Positive alpha simply means to outperform other ETFs in the category.
Both VAS and A200 score Bronze by the Medalist rating meaning Morningstar has conviction that this share class will be able to deliver positive alpha vs other ETFs in the category. To provide a passive ETF with a Bronze Medalist rating indicates that our analysts do not think that most active funds will outperform their passive peers.
Diversification
A key area where the two ETFs differ is sector and market cap concentration.
VAS tracks the ASX 300 which comprises of 100 more companies than A200’s Solactive Australia 200 Index. The additional companies under VAS result in a slightly lower concentration of mega and large caps and an increased number of smaller cap companies.
The chart below illustrates a market capitalisation breakdown for both ETFs. A200 has a slight skew (46%) to the giant caps in comparison to the giant holdings in VAS (44%) due to the dilution from 100 additional companies under constituency.
Notably, VAS also emphasises a more significant tilt (5.5% vs 3.2%) towards small and micro-cap companies. It should be noted that given the small amount weighting to the 100 additional companies in VAS, there is little meaningful difference.
Figure 1: VAS and A200 market capitalisation composition. Source: Morningstar. Author visualisation. VAS as of 31 March 2024 and A200 as of 28 February 2025.
The top ten constituents of both ETFs are the same, however as discussed above, VAS naturally results in lower weighting for the larger constituents due to the inclusion of 100 additional companies.
As seen in Figure 3 below, the top ten holdings of A200 comprise 49% of the ETF whilst VAS is a comparable 46%. Notably, the bottom 100 companies by market cap in VAS make up less than 3% of total ETF weight.
Figure 2: A200 (left) and VAS (right) sector composition. Source: Morningstar. VAS as of 31 March 2024 and A200 as of 28 February 2025.
Figure 3: Top 10 holdings of A200 and VAS by weight. Source: Public disclosures. Author visualisation. A200 as of 24 April 2025. VAS as of 31 March 2025.
Costs
Morningstar research shows that lower-cost funds generally have a greater chance of outperforming their more expensive peers. The chart below shows the cheapest quintile achieving a higher success ratio than the most expensive fee quintile. Despite this, investors should not look at fees in isolation as qualitative factors are also vital in determining a fund’s outperformance potential.
Figure 4: Low costs are key to success. Source: Morningstar. 2024.
The total cost of an ETF comprises of holding costs and transaction costs. The latter is often determined by your broker whilst the holding costs are linked to owning shares in an ETF.
Morningstar’s total cost ratio (“TCR”) aims to identify the main component of the total cost of an ETF. The TCR is typically a percentage of the holding value. The TCR includes management or investment fees, performance fees, administration fees and any other fees for underlying funds or similarly outsourced fee arrangements. An investment with a TCR of 0.5% and a holding value of $1,000 would incur $5 in fees per year.
A200 is crowned winner with a TCR of 0.04%, making it the lowest cost ETF providing exposure to the Australian market. VAS isn’t too far off with a TCR of 0.07%. Whilst this may not appear like a significant difference, the TCR becomes a larger consideration (than transaction costs) when the ETF is held over a long-time horizon.
Naturally, index ETFs will see minor deviations from their benchmark returns, largely due to their annual fees—this is referred to as a tracking difference. However, return lags beyond this can be attributed to tracking errors, which arise from factors such as transaction costs, liquidity constraints, and timing of trades. Tracking error is measured by the standard deviation of the variation between an ETF’s return and its benchmark’s return over time.
Minor tracking differences are expected and not generally a cause for concern.
Performance and volatility
From a trailing price returns perspective, the performance of both ETFs is similar, with A200 generating marginally superior returns over every period shown below. However, it is important to note that 10-year returns were not available for A200 to compare long-term performance.
Figure 5: A200 vs VAS trailing price returns. Source: Morningstar. Author visualisation. As of 31 March 2025.
The difference in returns can be attributed to a number of factors such as the difference in market capitalisation composition.
VAS has a slightly higher concentration of small cap players than A200, which could contribute to the slight returns difference.
Given the presence of smaller cap stocks in VAS, volatility should be taken into consideration. Standard deviation is a common measure of volatility that reflects the fluctuation from an average of returns over time. A measure of historical standard deviation (volatility measure) found that VAS derived 13.16% in a 5-year period, compared to A200’s 13%. This difference is minor and unlikely to be of concern to most investors.
The inclusion of smaller companies into a fund increases overall volatility, although just slightly in this case. For investors with longer time horizons, this small variation is unlikely to impact returns materially.
Investors deciding between VAS and A200 should consider the larger presence of micro and small caps in VAS, though for most may be negligible.
ETF valuation
I’ve applied our equity research share level valuations to the holdings of both ETFs. VAS screens at 1.13 price to fair value, indicating that it is currently overvalued, similar to A200 at 1.15 (April 2025).
Notably, neither ETF has traded below or at fair value since November 2023. In both cases I’ve applied a weighted price-to-fair-value ratio using analyst estimates when available and quantitative estimates for shares not in our coverage universe. Securities without either estimate are excluded from the calculation for that period.
Which ETF is best for your portfolio?
When making asset allocation decisions, it is important to align your choices with your investment strategy and goals. In this case, both ETFs offer similar returns and broad Australian market exposure with minor differences in diversification and fees.
There is a small, yet notable 0.03% variation in TCR for the two funds, even though in isolation, they are some of the lowest cost ETFs available in the market. If you invested $10,000 in each, at a 7% return before fees for 10 years, the future value of A200 would be $55 more than VAS due to lower costs (assuming the ETFs deliver the same return).
For investors seeking a higher level of diversification, the presence of micro and small caps in VAS may be suitable.
For more information on ETF investing, you can find some of our best ETF resources here.
