Welcome to my VDHG Review – Today I’ll be reviewing the Vanguard Diversified High Growth Index Fund (VDHG). I’ll be covering what VDHG is, the asset allocation and what each holding is. I will also touch on the pros and cons of investing in VDHG and its underlying assets.
VDHG is a diversified ETF that is comprised of seven different ETFs that track multiple markets and assets. An ETF is firstly a fund (the ‘F’), and therefore holds multiple assets in it. Secondly, it is exchange traded (the ‘ET’), meaning that you can buy and sell the same ways as with shares via a stockbroker. This is opposed to unlisted funds, which you must buy direct from the fund manager.
Long-term investors often choose ETFs, as they provide a convenient way of diversifying investment portfolios. This is due to ETFs tracking market indexes. Market indexes can encompass hundreds or thousands of individual assets.
Vanguard has taken this one step further, by providing an all-in-one type of investment vehicle. VDHG subsequently, provides exposure to the Australian market, large-cap, mid-cap and small-cap companies in developed and emerging markets and bonds. These holdings equate to VDHG being 90% growth (equities) and 10% defensive (bonds).
There are seven different ETFs in VDHG that equates to the following target allocations:
36% Australian Equities
38% International Equities
16% International Equities Hedged
|Funds||Target Percentage Allocation|
|Vanguard Australian Shares Index Fund (Wholesale) – VAS||36%|
|Vanguard International Shares Index Fund (Wholesale) – VGS||26.5%|
|Vanguard International Shares Index Fund (AUS Hedged) – VGAD||16%|
|Vanguard International Small Companies Index Fund (Wholesale) – VISM||6.5%|
|Vanguard Emerging Markets Shares Index Fund (Wholesale)- VGE||5%|
|Vanguard Global Aggregate Bond Index Fund (Hedged) – VBND||7%|
|Vanguard Australian Fixed Interest Index Fund (Wholesale) – VAF||3%|
The Vanguard Australian Shares Index ETF or VAS is an ETF that tracks the performance of an index consisting of the 300 largest companies by market capitalisation on the Australian Securities Exchange (ASX). Its largest portfolio holdings are CSL LTD, CBA, BHP, NAB and WBC. Sector-wise, it is primarily allocated towards Financials, Materials and Healthcare.
The Vanguard International Shares Index ETF or VGS is an ETF that tracks the performance of an index consisting of the 1547 large-cap and mid-cap companies listed on exchanges of the world’s major economies, excluding Australia. Its largest portfolio holdings are Apple, Microsoft, Amazon, Facebook and Alphabet (Google). Sector-wise, it is primarily allocated towards Technology, Healthcare and Consumer Discretionary. The top-weighted countries are the US, Japan, the UK, France and Switzerland.
The Vanguard MSCI Index International Shares (Hedged) ETF or VGAD is the same as VGS but it is hedged to Australian dollars. Hedging is an investment strategy in which the fund manager takes active steps to offset the impact of currency fluctuations. The intent behind this is to ensure that the returns (income and capital appreciation) are not impacted by currency fluctuations. By incorporating VGAD, the overall returns of VDHG are less susceptible to being impacted by currency fluctuations, adding a defensive measure against these potential impacts.
The Vanguard International Small Companies Index Fund or VISM is an ETF that tracks the performance an index consisting of 4032 non-Australian small companies from developed countries. Its largest portfolio holdings are Etsy, Pool Corp., Horizon Therapeutics, Monolithic Power Systems and Generac Holdings Inc. Sector-wise, it is primarily allocated towards Industrials, Information Technology and Consumer Discretionary. The top-weighted countries are the United States, Japan, the United Kingdom, Canada and Sweden.
The Vanguard Emerging Shares Index Fund or VGE is an ETF that tracks the performance of an index consisting of 1252 companies listed in emerging markets. Its largest portfolio holdings are Alibaba, Tencent Holdings, Taiwan Semiconductor Manufacturing Co., Samsung and Meituan Dianping Class B. Sector-wise, it is primarily allocated towards Consumer Discretionary, Information Technology and Financials. The top-weighted countries are China, Taiwan, Korea, India and Brazil.
The Vanguard Global Aggregate Bond Index Fund (Hedged) or VBND is an ETF that tracks the return of Bloomberg Barclays Global Aggregate Float-Adjusted and Scaled Index hedged into Australian dollars. It comprises of 9286 bonds spread across 2404 global issuers. Sector-wise, most funds are derived from Treasury, Corporate-Industrial and Corporate-Financial Institutions. The top-weighted countries are the US, Japan, France, Germany and the United Kingdom. 77.3% of bonds in VBND have an A credit rating or higher.
The Vanguard Fixed Interest Index Fund or VAF is an ETF that tracks the return of the Bloomberg AusBond Composite 0+ year Index. It comprises of 586 bonds spread across 187 Australian issuers. Sector-wise, most funds are derived from the Treasury, Gov-Related-Sovereign and Gov-Related-Agencies. 97.4% of bonds in VAF have a credit rating of A or higher.
Each one of the seven underlying ETFs offers different incentives for people to invest in them.
VAS provides exposure to the strongest companies on the ASX. While the Australian market only accounts for roughly 1.7% of the world’s global economy at the time of writing this, a lot of Australians choose to invest heavily in Australian assets. Through investing in the Australian market, Aussie shareholders receive higher dividends than those offered by other markets, in addition to receiving tax benefits through the franking system. This often makes investing in the ASX an appealing prospect for Aussies.
VGS is currently the largest ETF by fund size offered through VDHG, which does not come as a surprise, given that it holds major tech giants such as Apple, Amazon, Google and Microsoft. This ETF provides exposure to the world’s dominant global market and the tech-sector which in recent years has become one of the highest performing sectors.
VGAD tracks the same index as VGS, however, it is hedged to Australian dollars. This acts as a safety buffer and added precaution against currency fluctuations, which can impact the income and capital appreciation of VGS. Also, if the Australian dollar were to increase in relation to the USD by the time that you wish to sell down your VGAD, this hedged option would provide greater returns.
VISM provides exposure to small-cap companies. Small-cap companies are more volatile than large-cap and mid-cap companies because they are less defensive, more leveraged and are impacted more by currency fluctuations. However, having a small market cap can also be viewed as advantageous, as these companies have more room to grow. Subsequently, VISM provides a higher risk, higher return layer of diversification to VDHG, which may potentially result in higher returns over a long-term investment horizon.
VGE is probably considered the riskiest aspect of VDHG, as it comprises of emerging markets. These markets are more susceptible to currency swings, political corruption and economic volatility, due to things such as natural disasters. However, given that these economies are new and have a lower overall market cap, their growth potential is significantly higher than in developed markets. For this reason, VGE can be a useful asset to hold if you’re willing to tolerate the high-risk, high-reward potentiality of emerging markets.
VBND provides exposure to bonds, which are considered a defensive asset. Defensive assets are used as a mitigation strategy for market fluctuations. For example, while bonds typically underperform equities over long investment horizons, they typically hold up better during market corrections and recessions. In fact, they can often increase in value, as bond prices typically increase when interest rates fall. The government often lowers interest rates during recessions to provide people with more money to spend on goods and services to help prop up the economy.
Lower interest rates can also incentivise people to use leverage to purchase luxury items that they otherwise wouldn’t. As such, VBND offers diversification into defensive assets that can potentially offset some losses encountered to the other underlying funds during market corrections.
VAF is similar to VBND, in that it provides additional exposure to bonds and provides a further level of risk mitigation. Although, VAF primarily utilises Australian bonds, meaning that you have an added layer of investment in the Australian economy. This can be viewed as a positive or a negative depending on which side of the fence you sit on. However, VAF has a significantly higher allocation of A, AA and AAA credit rated bonds, making it a lower yielding, yet potentially more stable defensive asset than VBND.
Diversification is an investment strategy in which investors invest in a range of different assets and markets to ensure that they gain exposure to multiple forms of revenue. This is akin to the saying ‘don’t put all your eggs in one basket’. The benefit of having a diversified portfolio is that even if a few of your holdings under-perform in a given year, your other holdings may provide above-average returns. This provides more stability to your investment portfolio, which tends to yield more consistent returns.
As seen in the above portfolio holdings, VDHG contains exposure to the Australian market, large-cap, mid-cap and small-cap companies in developed and emerging markets and bonds. Another way of looking at this is that by investing in VDHG, you are essentially investing in 8,000 + stocks split across the global market and almost 10,000 bonds. Subsequently, by investing in VDHG, you gain access to one of the most diversified investment vehicles on the market.
For investors who want to invest in all of the underlying holdings of VDHG, this provides a cheaper alternative. Through purchasing VDHG, you only need to pay one transaction fee to buy a fund that comprises of these other seven ETFs, making VDHG a very convenient way of diversifying your investment portfolio.
Like the above point, VDHG and other diversified ETFs are perhaps one of the most convenient forms of investment products. The reason behind this is that they offer an all-in-one, set and forget type of product. Unlike more active portfolios that require you to stay on top of your underlying holdings, file separate tax documentation for each asset and require manual rebalancing, VDHG has this all covered.
Admittedly, this convenience comes with a cost of having a higher Management Expense Ratio (MER) than most ETFs at 0.27% p.a. However, the convenience of being able to have your portfolio remain diversified, whilst also automatically rebalancing is often regarded as worth it in the eyes of investors who like this style of investing.
Lastly, by not having to think about your asset allocations, having to manually rebalance your portfolio on a frequent/semi-frequent basis or having to make frequent purchases of different ETFs, VDHG is very much a set and forget type investment. As such, for passive investors who do not have a great understanding of different markets or those who wish to spend their spare time on other ventures, VDHG is one of the best-suited investment vehicles.
When it comes to investing, there is always a risk of human error. Inherently, some people are better suited to investing than others. Things such as personal bias, fear of missing out (FOMO), panic selling or constant changes in investing habits can significantly diminish returns and in some instances, can result in losses.
Regarding personal bias, people with an affinity for certain stocks or ETFs may greatly overweight their profile towards a certain market or sector. This can of course work in their favour, but a lack of diversification can also result in significant losses should that asset take a hit. By utilising VDHG, you have enough diversification to suffer a loss to one or several of your holdings. This is because you avoid having all of your funds in the worst-performing asset class, mitigating against permanent decimations to your profile and providing more overall stability.
FOMO occurs when an investor decides to buy something at an all-time high, expecting it to rise even further. It can also occur with someone selling at an all-time low, expecting it to lower further. These are usually impulsive, emotionally based decisions that result in people losing a lot of their hard-earned, compounded growth. In other portfolios, it can be easy to liquidate one or two of your assets under stressful circumstances.
However, if VDHG is your only investment vehicle, it is less likely that you will FOMO your way into a poor decision by selling off your only investment under times of stress. For this reason, it is advised that you hold VDHG for a long investment horizon and check on it as infrequently as possible, as it has been designed to grow over time without external manipulation.
Lastly, some people change their investment strategies frequently. While this may be useful in some instances, it most often hurts the overall returns of a profile. This can be seen in investors who hold 10 or more holdings, as they are constantly chasing a new product under the guise that it may outperform their previous ones. Through constantly picking up new ETFs or other assets, investors can encounter significant costs concerning brokerage fees and MER.
Investing frequent, lower sums of money into different assets can also result in over-diversification or performance drag, which can reduce your overall returns. This occurs due to owning so many investments that you are more at risk of having poorer performing ones that can offset better-performing ones, lowering the likelihood of experiencing high growth.
For these reasons, VDHG is an excellent option for impulsive buyers who are prone to these common investment mistakes, as it is designed as a set and forget type of product that doesn’t need human interference to work.
While diversification is a good thing, some people may view VDHG as being too diversified. For example, before the inception of VDHG, a very common practice among the FIRE community was to invest in VGS and VAS. This meant that Aussie investors had only two holdings, which gave exposure to two of the most invested markets. Similar allocations exist with people simply adding VBND for more bond exposure or VGE for exposure to emerging markets. These require manual rebalancing and more diligence in deciding on an appropriate allocation, However, it gives investors the ability to invest solely in holdings that they wish to invest in.
Subsequently, investors who have portfolios that consist of fewer holdings may find it easier to track their overall returns. They can also adjust their asset allocations accordingly to suit their intended investment outcomes. For example, if someone decides that they want to be a more dividend-focused investor, they can increase their allocation to Australian assets. This is due to Australian assets such as VAS or LICs utilising dividends as a more prominent investment strategy. Alternatively, someone who is nearing retirement age may wish to have a higher bond allocation. As a higher weighting of defensive assets can reduce portfolio volatility while they are drawing down on their funds.
With VDHG, you are also locked into your asset allocations. This wide range of diversification can be viewed as a positive, as more holdings mean more spread. By having a greater spread, it is less likely in each time frame that all assets will under-perform. Meaning that even if some of the underlying ETFs perform poorly, the high-performing ETFs can offset this to some degree.
However, this may also be viewed as a con. As some investors who would prefer to roll their portfolios may not want such a large spread. This is due to the higher likelihood of VDHG containing more under-performing holdings. At the end of the day, this widespread and diversification can be viewed as a good or bad thing. So it’s important to consider whether you want such a wide diversification.
VDHG offers a lot of convenience as an all-in-one investment vehicle, with exposure to seven different ETFs. However, the holdings and more particularly, their percentage allocations of the overall portfolio may discourage some investors. A risk-averse investor may want a higher allocation of bonds and no exposure to emerging markets or small-cap companies. As this will provide more stable returns.
Investors with higher risk tolerance levels may want no exposure to defensive assets. Instead, opting for a greater allocation of exposure to these riskier markets, due to the higher growth potential. Subsequently, VDHG will likely contain ETFs that investors would otherwise not invest in. With these investments otentially impacting your overall returns by being too volatile or too defensive.
Similarly, to the above point, an issue that comes with VDHG is that the holdings and allocations are pre-determined. By having pre-determined allocations, you must weigh the inner investments per VDHG’s management. This may be considered a pro for people who are happy with the way that the portfolio is constructed. Particularly for investors who are perhaps new to the game or don’t want to think about their allocations.
However, certain investors such as dividend investors would likely prefer a higher portfolio weighting towards Australia. As Australian equities offer higher dividends with unique tax advantages. Similarly, growth-oriented investors with long investment horizons may want a 100% equities-based portfolio, to optimise growth.
Alternatively, someone may prefer to only hold large-cap companies in developed economies. As they are less volatile than their developing country counterparts. If you fall into this category, you may find that a roll your own approach is more appropriate. As you can choose the holdings that you would like and give them allocations that you are happy with. This comes at the cost of doing more research into holdings. In addition to having to rebalance your portfolio and requiring more work around tax time. . However, investors who have a sound understanding of markets and prefer to take a more active role in their investing journeys may outperform VDHG by using this method.
Defensive assets are a touchy subject for investors. Some people prefer to have no exposure to optimise growth. Alternatively, others like having a small amount for peace of mind. Risk averse investors prefer a much higher allocation to prevent volatility. As VDHG is a high growth asset, these defensive assets while useful for mitigating against short term market fluctuations. However, they can hinder long-term performance. This is because equities have a history of outperforming bonds over greater periods, due to their higher annualised returns.
These defensive assets may not be appropriate for people with high risk tolerances and long investment horizons. Conversely, investors who are nearing retirement, may want a greater bond allocation to avoid dramatic fluctuations in their portfolios. If this is the case, VDHG’s 10% allocation may be perceived as too low. For more risk-averse investors or those nearing retirement age, Vanguard offers other diversified ETFs with higher allocations of defensive assets. These are VDGR – Growth (70/30), VDBA – Balanced (50/50) and VDCO – Conservative (30/70).
If you have already invested in VDHG and wish to increase your defensive asset allocation, you can buy more VBND or similar bond ETFs. This requires manual rebalancing and will incur additional MER; however, it may be a useful strategy for people in this situation.
|Diversification||Risk of Over-Diversification (Performance Drag)|
|Mitigates Against Human Error||Allocation of Defensive Assets|
VDHG is one of the most popular investment vehicles among Aussie investors chasing financial independence and for good reason. It offers a convenient and cost-efficient way of diversifying into almost 18,000 assets split across Australian, developed and emerging markets. This simple, all-in-one, set and forget type of investment vehicle offers convenience, diversification and mitigates against human error.
However, it may not be suitable for more active investors who would like to narrow down their investment holdings and decide on their asset allocations. Similarly, higher-risk investors and risk-averse investors may prefer other alternatives. Due to these alternatives catering to more aggressive or defensive investment approaches. For individuals who fall into these categories, a roll your own approach may be more appropriate. As you can augment your portfolio to reflect your risk tolerances and financial objectives with this approach.
Alternatively, other diversified ETFs such as DHHF which is 100% equities may be more suited for growth-oriented investors. Whereas more risk averse investors may prefer to utilise more defensive diversified ETFs such as VDGR, VDBA or VDCO.
All things considered, I personally like VDHG and view it as a suitable investment vehicle for most Aussie investors. Beginners, passive investors, emotional investors and people who are happy with the underlying holdings of VDHG, can utilise VDHG over a long-term horizon to reach their financial goals. This comes without the hassle of rebalancing, doing frequent market research and making frequent brokerage transactions. As such, VDHG is one of the most convenient investment vehicles to assist people with reaching financial independence.
Currently, VDHG’s main competition is the BetaShares Diversified All Growth ETF (DHHF). This is a more aggressive diversified ETF that contains exposure to global and Australian equities without any exposure to defensive assets (bonds). You can read my in-depth review of DHHF and how it compares to VDHG below:
If you would like to invest in VDHG or any of the aforementioned diversified ETFs, I recommend using SelfWealth. As it offers the lowest flat-rate brokerage fees among any CHESS-sponsored trading platform in Australia. For more information, you can find my in-depth review on SelfWealth Here.
If you would like to sign up and receive 5 free trades during your first month, you can also use my referral link.
Eli at passiveinvestingaustralia.com provided inspiration in writing this review from his previous review entitled: VDHG or roll your own. He was also kind enough to go over this review to make sure everything was correct. I highly recommend his website and VDHG review to gain a more holistic overview of passive investing options in Australia.