The most popular ASX exchange-traded fund (ETF) is the Vanguard Australian Shares Index ETF (ASX: VAS). I'm measuring popularity by how much money is invested in the fund, which was $18.7 billion at the end of January 2025.
ETFs like the VAS ETF track an index of shares. This fund tracks the S&P/ASX 300 Index (ASX: XKO), which is a list of 300 of the biggest businesses on the ASX.
This could be an effective option for investors that just want to track the performance of the 'Australian share market'.
Is it a good option to invest in? Here are some of my views on it.
Investors don't need to find the next Microsoft or Amazon to grow their wealth at a good pace. If an investment delivers a return of 8% per year, it would mean their money doubles in approximately a decade.
There are some professional investors that fail to beat the return of the ASX share market, so owning the VAS ETF can lead to outperforming professional investors who look at shares for a living. Just achieving the 'average' is actually a pretty good outcome.
One of the main attractions of the Vanguard Australian Shares Index ETF is its incredibly-low annual management cost of 0.07%. Some funds that professionals manage charge 1% of the fund's value as fees, and may also charge outperformance fees if they do beat the market.
Over the past five years, the VAS ETF has delivered an average return per year of 7.9%. As part of those returns, the fund usually pays a pleasing level of passive income, which is largely the dividend income the ETF has received from the businesses it's invested in. In the last five years, the ASX ETF's distribution has been an average of 4.4% per year.
The VAS ETF has done its job at tracking the ASX. However, the ASX 300 is dominated by ASX financial shares and ASX mining shares, which are not known for delivering big profit growth year after year.
I believe profit (growth) ultimately justifies share prices going higher and funds the dividends.
According to Vanguard, the VAS ETF portfolio of companies had a return on equity (ROE) of 12.4% at 31 January 2025. For money not paid out as a dividend, investors may expect the retained money to make a return (profit) of 12.4%. So, if a business retains $100, it may boost annual profit by an additional $12.40.
The companies in the global share market usually have a higher ROE than 12.4%. For example, the Vanguard MSCI Index International Shares ETF (ASX: VGS) has a portfolio ROE of 19.6%. That means retained money could make a return of almost 20%.
Over the years, I'd expect the profits of businesses with a higher ROE to grow faster than businesses with a low ROE because the reinvested money can earn more. Therefore, businesses with a higher ROE are more likely to produce stronger shareholder returns over the long-term.
Aussies can, and perhaps should, allocate some money to the ASX share market/VAS ETF, but I'd suggest it'd be beneficial for wealth growth purposes to allocate more to global businesses, particularly if passive income isn't a key goal.
We should also remember that receiving higher levels of passive income could mean handing more of our returns over to the Australian Taxation Office. Income is taxed each year it's received. That may not be as effective as holding onto a growing asset and not selling it (and not activating capital gains tax (events)).
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