Young & Invested: The one ETF portfolio
99% of investors won’t be the next Warren Buffett – luckily, we don’t need that to be successful.
Mentioned: Vanguard Diversified High Growth ETF (VDHG)
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 21 (revisited)
Stocks or ETFs?
I used to be an avid investor of sexy stocks. Nothing enthused me like a speculative lithium mine in pre-development. Unsurprisingly, attempting to consistently pluck out the winners is not a successful investment strategy for most 20 year olds.
Younger investors can be encouraged to take risks and speculate, because a longer time horizon should theoretically allow time to recoup losses. But I’m not sure I agree with this. A few years of brain development later, I’ve concluded that a portfolio of individual stocks is simply not my preference.
Industry consensus is that a well-diversified stock portfolio typically consists of 15 to 20 companies. The process to build and constantly manage a portfolio of this size can be a tedious exercise.
Not everyone has the time or interest to build a traditional equity portfolio. In fact, I think the rise of ETFs has been partially bolstered by the emergence of a type of ‘lazy investor’, who isn’t particularly interested in financial markets but understands they must invest to reach their goals.
In the spirit of exploring things that make investing easier, this edition of my column will look at an ‘all-in-one’ ETF – an offering designed to provide investors with a diversified portfolio in one trade.
How many ETFs should you actually own?
Whether in life or investing, we’ve all heard of the phrase “don’t put all your eggs into one basket”. In both contexts, the logic of this advice serves as a risk mitigation strategy, rather than a method to derive the maximum returns. But how far does that reach before it begins to lengthen the proximity to your goals?
Experts conclude that a portfolio of five to ten ETFs is an appropriate amount for optimal diversification. However, I like to think there is no one-size-fits-all answer. Ultimately your choice will be guided by your investment strategy.
Fewer funds typically suit those who prefer a hands-off or ‘set and forget’ approach, whereas those on the more enthusiastic side may want a larger portfolio that allows for greater diversity and non-core exposure.
Personally, I am a proponent of simplicity. I invest in around three broadly diversified ETFs for domestic and international equity exposure. Could this number be smaller? Sure.
There’s an endearing term we often use – ‘forever investments’ – to define stocks that meet the specific criteria of a potentially indefinite holding. But is there an ETF equivalent? What if I wanted just one to hold forever?
Enter the one-fund portfolio
All-in-one ETFs are designed to provide a singular investment product that can diversify across multiple asset classes with one trade.
Such products were introduced to appeal to investors who are new to investing or wish to simplify the investing process.
A potential drawback
Static asset allocation
A Vanguard study that examined long term market returns across different asset allocations, found that 100% exposure to stocks resulted in the greatest average returns.
It’s easy to look at these results and conclude that 100% exposure to equities is the optimal allocation for returns maximisation. However, your short and long-term goals are incredibly important in determining your investment strategy.
Logically, there will come a time in an investor’s life when a ‘set and forget’ strategy no longer suffices, and a one ETF strategy introduces certain limitations.
As market conditions and personal circumstances evolve, holding one fund with a fixed allocation becomes impractical.
A portfolio that contains multiple funds allows for easier gradual rebalancing, switching entirely from one ETF to another requires selling and incurring capital gains.
For example, an ‘all-growth’ approach typically lends itself to accumulators with a longer time horizon. If at 26 years old, I hold an ETF with a 100% equity allocation, this will naturally no longer align with my need for capital preservation upon retirement 40 years later.
A one fund approach makes it difficult to facilitate a portfolio shift without introducing significant tax implications.
Benefits
Conversely, this static asset allocation may also serve as a benefit.
I often reference our Mind the Gap study, as I believe the results inform the way we should think about investing. This data points to a 1.2% gap in average fund returns vs average investor returns for every dollar invested. What this implies is that we are imperfect investors who make poor decisions, whether that be panic selling in a downturn or trying to time investments.
Asset allocation has long been championed as the primary driver of portfolio performance, accounting for almost 94% of returns. Maintaining a fixed allocation through one ETF means that the investor is less likely to make impulsive decisions and contribute to the 1.2% performance gap referenced above.
Furthermore, traditional DIY portfolios typically require a greater administrative upkeep, such as a manual rebalancing schedule as certain asset classes outperform others. An all-in-one ETF handles this process automatically to maintain its target allocations without requiring investor intervention.
For this article, I’ll be exploring Vanguard’s Diversified High Growth Index ETF VDHG.
Vanguard Diversified High Growth Index ETF VDHG
- Assets Under Management: $4 billion (AUD)
- Morningstar Medalist Rating: Silver
- Management fee and costs: 0.27% p.a.
Vanguard’s High Growth Index ETF offers investors a straightforward, cost-effective way to access a 90/10 mix of growth and defensive assets.
As the name implies, this ETF is designed for investors with a high risk tolerance and the willingness to accept higher volatility to achieve their objective. This often lends itself to those in the accumulation phase.
The fund’s growth allocation aims for 36% exposure to Australian shares and 54% to international shares. The remaining 10% is a defensive allocation split between international (7%) and Australian fixed income (3%).
This 90/10 growth and defensive mix is broadly consistent with the type of portfolio often favoured by younger investors. A common approach is to hold two or three ETFs that provide diversified exposure to both Australian and international shares. The key difference here is that this fund packages those exposures into a single investment.
Rather than selecting, managing and rebalancing multiple ETFs, investors gain access to a pre-built portfolio with a fixed asset allocation determined by the fund. This may appeal to investors who value simplicity and are comfortable outsourcing asset allocation decisions to the fund manager.
Portfolio composition
The ETF is comprised of several underlying holdings:
Our fund analyst notes that the portfolio closely mirrors its Morningstar category index (Morningstar Australia Aggressive Target Allocation). Changes to the strategic mix tend to be infrequent, meaning the fund is designed to deliver market-like returns rather than seek outperformance.
Performance and fees
VDHG’s performance has been consistent with our expectations for a passive, diversified strategy. We think investors should expect results in line with the broader market.
Over the past five years, VDHG delivered an annualised return of 8.8%. Calendar-year results further highlight the fund’s consistency. Performance has generally matched or exceeded the category over the last 8 years.
Below we see the growth of $10,000 invested in VDHG since inception, which comfortably outperforms its category.
Vanguard’s disciplined rebalancing and low fees have supported these outcomes, but investors should not expect significant outperformance.
The fund’s process is designed for reliability and predictability, making it a sensible choice for those seeking benchmark-like returns and broad diversification over the long term.
The fund’s total cost ratio is 0.27% per year. This figure places it in the cheapest quintile of the category, where the median fee is 1% per year.
What we think
Overall, the Vanguard High Growth Index strategy is a solid option for investors seeking a reliable, transparent, and low-cost core holding.
While it is unlikely to deliver significant outperformance, its disciplined approach, experienced team and focus on investor outcomes make it a dependable choice for high-growth portfolio exposure.
Conclusions
Holding a just single “all-in-one” ETF may eliminate the decision fatigue investors often experience. This can also be beneficial for those who prefer a hands off approach. However, it’s hard to conclude whether there is one ETF you can definitively buy and hold forever.
Your goals and circumstances are constantly evolving, which may demand some level of flexibility that such ETFs do not provide.
The largest implication of a one-ETF portfolio is its static asset allocation, which will incur a significant tax event if attempting to rotate out of the holding to reflect a change in circumstance or strategy.
