This is a snapshot of Morningstar's data and analysis of the Vanguard Australian Shares fund. Fund analysts provide detailed analysis and ratings for over 70 Australian exchange traded funds, representing over 75 per cent of the market.

Vanguard's Australian Shares ETF – known to many by its ticker VAS – occupies the position of Australia's largest and most traded exchange-traded fund.

The fund, which offers investors exposure to Australia's largest 300 companies (by market capitalisation) at a very low cost, was first listed by US investment management giant Vanguard in May 2009.

Since, it has grown to over $5 billion in assets, and features heavily in the portfolios of Australian investors.

It's also favoured by first time investors due to its relative simplicity, ease of access, cost and diversification benefits.

When investors buy an ETF, what are they actually getting? ETFs are different to stocks. This means investors must make different considerations.

Broad market ETFs hold hundreds if not thousands of individual stocks, aim to track an index, and are managed by an investment firm, at cost. 

Let's look under the hood of VAS (ASX: VAS).

If you're unfamiliar with how ETFs work, read this first.


While VAS's assets under management dipped slightly during the March bear market, it remains Australia's largest ETF with over $5 billion in total net assets. This is up from $3.6 billion just a year ago.

Size is an important factor because funds must reach a certain threshold before they become viable. ETFs that fail to reach a certain size face closure. At least twenty five Australian ETFs have been terminated since 2013.

The bigger they grow, the easier it becomes for them to also attract additional investment and cut fees. 

"[VAS's] large size brings economies of scale to the effort and allows Vanguard to invest in virtually all of the securities that make up the index," Morningstar fund analyst Edward Huynh says.

VAS was also the most traded ETF and the third most traded security by Sharesight users in June 2020.

Net asset growth | 5 largest Australian ETFs (today) (01/07/2010 – 30/06/2020)

vas chart 1

Source: Morningstar Direct


VAS aims to track the S&P/ASX 300 Accumulation index. The benchmark covers about 85 per cent of the Australian equity market capitalisation.

Vanguard employs a full-replication approach and is designed to hold all or most of the 300 securities in the index. Vanguard may deviate slightly from the index when the managers believe that such deviations are necessary to minimise transaction costs, Huynh says.

"For example, managers may delay trading stocks that fall into or out of the index if they think a stock's price has been unduly distorted by trading around the index change.

"Or the managers may decide to exclude the index's smallest, most illiquid stocks if the transaction costs associated with buying them exceed the tracking error associated with omitting them."

The S&P/ASX 300 Index is dominated by giant- and large-cap companies. Therefore, VAS is top-heavy, with about 29 per cent of the index in the top five companies – CSL, Commonwealth Bank, BHP Group, Westpac Banking Corp and National Australia Bank.

VAS holds 42 per cent of its assets in the top 10 stocks.

By tracking the S&P/ASX 300, VAS gives investors a slightly larger exposure to small-cap stocks – 6.36 per cent compared to the S&P/ASX 200 index exposure of 5.58 per cent – and micro-cap stocks.

VAS | Portfolio Holdings (31/05/2020)

vas chart 2

Source: Morningstar Direct

Sector Exposure

With the majority of the S&P/ASX 300's top holdings in bank stocks, VAS's sector weighting is skewed towards the financial services sector at around 26 per cent.

The basic materials sector is also dominant, although this has declined as the mining boom waned, Huynh says.

"Basic materials peaked around 31 per cent of the portfolio in 2008 but shrank to around 18 per cent by March 2020, while energy fell from around 8 per cent to around 4 per cent during the same period."

Some prominent global sectors are underrepresented in the Australian market. Technology and to a lesser extent healthcare (thanks to the share price rise of CSL) combined make up around 17 per cent of the index—a lower proportion than equivalent US and European indexes.

Exposure to technology companies has been growing, up from around 0.25 per cent of the index in August 2004 to 3.36 per cent today. Healthcare has grown from 2.81 per cent to 12.07 per cent over the same period.

By sector weighting, cyclicals – including basic materials, consumer cyclicals, financial services and real estate – dominate the portfolio at almost 60 per cent. This is followed by sensitive – communication services, energy, industries and technology – and defensive – consumer defensive, healthcare and utilities – both at about a 20 per cent weighting.

VAS | Equity Sectors (Morningstar) (01/05/2005 - 31/05/2020)

vas chart 3

Source: Morningstar Direct


Being an index-tracking fund, VAS can't escape the ups and downs of the broader market. Declines in the resources and energy sectors hurt in 2015, as well as lacklustre bank stock prices in 2018.

Huynh says these fluctuations serve as a reminder of the Australian share market's high dependence on economic activity, as seen in this vehicle's high exposure to cyclical and sensitive sectors.

"The 2008 credit crunch was the worst example of this, with Vanguard Australian Shares Index posting a drastic negative 38.78 per cent return, followed by an astounding rebound of 37.25 per cent in 2009," he says.

Huynh says VAS's small-cap exposure risk causing occasional portfolio volatility and illiquidity.

"Over the past decade, the fund's small-cap allocation had been a headwind, but in 2015, this turned out to be an advantage as mega-caps underperformed."

VAS has closely tracked the index's performance over the long term, marginally ahead of its category peers.

Morningstar analysts have applied a Bronze rating to VAS, saying that while it’s a cheap option for investors seeking passive exposure to the Australian equity market, there are better options.

The best active managers, they say, can outperform VAS in the equities space. Average managers, however, will lose out to Vanguard over the long run.

"Overall, we believe that the best active managers can beat the benchmark consistently over time, though the hurdle is quite high, and evidence suggests most falter," Huynh says.

None of the major Australian share-tracking ETFs have secured Gold or Silver ratings for similar reasons. Instead, analysts have applied Bronze ratings across all providers – STW, VAS, IOZ and A200.

MORE ON THIS TOPIC: These ASX200 ETFs are good but not gold, says Morningstar

In contrast, a handful of S&P 500-tracking ETFs carry a Gold rating, as well as several Vanguard multi-asset ETFs.

VAS | Investment growth compared to four Gold-rated Australian equities managers and the blended fund category average (01/07/2010 – 30/06/2020)


Source: Morningstar Direct


While there's little an index-tracking ETF can do to differentiate itself on performance, price is somewhere where product providers make their mark. Fee competition is rife in the increasingly commoditised passive market-cap space, particularly among Australian shares broad market ETFs.

Over the past few years, fees have plunged among the four largest product providers – Vanguard, SPDR, iShares and BetaShares – as investors chase value and more products come to market.

Homegrown ETF provider BetaShares rocked the core Australian ETF market in 2018 with the launch of the BetaShares Australia 200 ETF (ASX: A200) with a fee 0.07 per cent. At the time, this was half the cost of its nearest Australian equity index rival.

iShares Core S&P/ASX 200 ETF (ASX: IOZ) and VAS slashed their fees a year later – IOZ from 0.15 per cent to 0.09 per cent, and VAS from 0.14 per cent to 0.10 per cent.

Bowing to pressure, SPDR S&P/ASX 200 ETF (ASX: STW) dropped its fee from 19 basis points to 13 basis points earlier this year.

MORE OF THIS TOPIC: State Street closes fee gap as ETF investors chase value

At 10 basis points, VAS is one of the cheapest ways to track the Australia market – less expensive than active rivals and most passive strategies.

VAS | History of fee decline among the big-four Australian shares passive ETFs


Source: Morningstar DatAnalysis, ASX Announcements

Morningstar analysts have also reviewed and re-affirmed their ratings for several Vanguard funds this month:

Beginners guide to ETFs:

Edward Huynh is a manager research analyst for Morningstar Australasia.