Looking for a well-diversified portfolio made of solely of ETFs? Look no further! In this blog post, we will take a look at the dynamic trio of a VAS VTS VEU portfolio. This is a three-ETF portfolio that offers investors broad exposure to global markets. It is ideal for those who are looking for a low-cost and hassle-free investment option. Let’s take a closer look at each of these ETFs and see why they might be a good fit for your investment needs.
The 3 ETF Portfolio
Recently we looked at a few different ‘all in one’ ETF’s like Vanguards VDHG that give you instant diversification to a global portfolio in on singular trade. While these are great options for those who are time poor (not that this is an issue with trading platforms that offer auto invest like Pearler!). If you are the type of investor that looks to maximise their returns, minimise their management fees, and don’t mind a little extra work – then this three ETF core portfolio might be a great option for you.
The Three ETF Portfolio Utilises three of the heaviest hitting Vanguard ETF’s:
- Vanguard Australian Shares Index ETF (ASX:VAS)
- Vanguard U.S. Total Market Shares ETF (ASX:VTS)
- Vanguard FTSE All-World ex-US ETF (ASX:VEU)
When combined these three ETF’s provide global exposure that rival any of the ‘all in one’ available on the market. But to really understand how powerful this portfolio is lets take a look
VAS Overview
If you’re looking for a solid way to invest in the Australian stock market, the Vanguard Australian Shares Index ETF (VAS) is a great option. This fund tracks the S&P/ASX 300 Index, which is made up of the 300 largest companies listed on the Australian stock exchange. This includes some big name companies such as Telstra, BHP Billiton, and Westpac. If you’re looking for broad exposure to some of Australia’s most successful businesses, VAS is a great way to do it.
VTS Overview
The Vanguard US Total Stock Market ETF (VTS) is a great investment option for individuals who want to track the performance of the entire U.S. stock market. With over $3 billion in assets under management, VTS is one of the most popular and well-known ETFs on the market. The VTS fund invests in over 4000 underlying stocks, with 28.4% of the fund allocated to US Tech stocks such as Apple, Tesla, Microsoft, etc. This makes VTS a great choice for investors who are interested in gaining exposure to the tech sector of the U.S. stock market.
The ETF, which is exposed to the fluctuating values of the US currency, offers low-cost access to a broadly diversified range of securities that allows investors to participate in the long-term growth potential of some of the world’s largest companies listed in the United States. It provides exposure to a wide range of industries, including technology, healthcare and industrials
VEU Overview
The Vanguard FTSE All-World ex US ETF (VEU) is a global stock market index fund that seeks to track the performance of the FTSE all-world ex US index. This index excludes stocks from the United States, making it a good option for investors who want to diversify away from the US market.
Like most investors, we aren’t a big fan of doubling up on investments so it is worth noting that VEU contains about 5% Australian equities, so it may not be the best option for Australian investors who are looking for sticklers for portfolio diversification. However, VEU offers global performance and is worth considering for anyone looking to invest in overseas markets.
Performance
Vanguard Australian Shares Index (ASX: VAS) has been an excellent investment choice for those looking to achieve consistent returns. The fund has generated an average annual return of 10%, which is equivalent to the returns generated by the index. This is due to the ETF tracking the index closely, which means that you are essentially investing in the same companies as everyone else who has invested in VAS. If you had invested $10,000 solely in VAS in 2009 you would currently have just under $30,000 – the impressive part is of that $18,000 in growth over half has been from dividends. This is what makes VAS such a powerhouse in the three ETF portfolio.
The Vanguard Total Stock Market Index Fund (VTS) has had a phenomenal performance since its inception, returning an average of 16.3% per year. As shown in the Sharesight Share Checker, if you had invested $10,000 in VTS at the beginning of 2009, your investment would be worth over $50,000 today. While there, unfortunately, is no dividend reinvestment plan available for VTS, investing in this fund still offers a great opportunity to grow your wealth. With VTS providing such strong returns, it’s definitely a heavy hitter in our VAS VTS VEU portfolio.
Rounding out our Portfolio is Vanguard FTSE All-World ex-US ETF (ASX:VEU). The performance of VEU has been quite solid since inception, averaging returns of 6.5% per annum. If you had invested $10,000 in VEU solely at the beginning of 2009, your investment would be worth almost $25,000 today. VEU provides a great opportunity to invest in some of the world’s leading companies that are based outside of the United States. While there is some Australian overlap with this ETF, it is still a great choice for investors who are looking to diversify their portfolio.
To really understand what a portfolio of these three ETFs let’s just assume we invested in these funds equally and one third of the portfolio is dedicated to each ETF. To be honest, this is actually near the weighting we would recommend anyway! If we look at performance over the past 10 years on average the three ETF portfolio would have returned 11.75% percent per annum. This means you would outperform an index such as the the ASX200 which has returned just shy of 9% per annum over the same period.
Dividends
Another important factor to consider when looking at ETFs is the dividends they offer. VAS investors are able to enrol in a dividend reinvestment plan (DRP), which allows you to automatically reinvest your dividends back into more shares of the fund. This gives your investment an opportunity to compound over time and can result in larger returns down the track. We like to think of reinvesting your dividends as a vessel to supercharge your wealth using the magic of compounding.
For reasons we will look at shortly VEU and VTS don’t offer DRP, however, they still offer dividends which have to be taken in cash. With Yields closer to 2-3% these stocks are definitely not prime income stocks. Like most companies outside of Australia there is a focus on growth by reinvesting profits instead of paying them out to shareholders as dividends/distributions.
While VAS is the clear winner when it comes to dividends, VTS and VEU offer investors the potential for higher capital growth. This is why we believe a portfolio including all three of these ETFs provides the perfect balance for Australian investors.
Domiciles
Now that we have looked at the performance of VAS, VTS and VEU it’s important to understand where these companies are domiciled. VAS is an Australian based ETF, which means it is subject to Australian taxation rules. VEU and VTS, on the other hand, are both domiciled in Ireland. This has a few implications for investors:
Paperwork
The main implication for investors is the paperwork required to declare these ETFs in an investment portfolio. Because VEU and VTS are domiciled outside of Australia, Australian investors need to complete a W-8BEN form (normally available from your broker’s website) in order to declare these funds as part of their taxable income.
This is a relatively simple process and only needs to be completed once for each fund. The W-8BEN form essentially allows the ETF provider to apply the correct amount of withholding tax to any dividends paid out to Australian investors.
While this form sounds painful, it is a pretty simple process and shouldn’t take too long to complete. On a positive note investors only need to do this paperwork once every three years, so really it is a slight bit of pain for a major gain!
Dividend Reinvestment Plans
Another implication of VEU and VTS being domiciled in the US is that they are not able to offer Dividend reinvestment plans to Australian investors. This is because the shares are held in a foreign company, which means they are subject to different taxation rules.
While this might seem like a downside, it really isn’t too big of a deal. If you’re invested in these ETFs for the long term then you can simply reinvest your dividends into more shares using a broker platform such as Pearler. If you have set up Automatic investing with your broker then this cash payout may actually suit you better as it will hit your linked brokerage account ready to be invested in your next cycle.
Frequently Asked Questions
Is VGS better than VTS & VEU?
Vanguards MSCI Index International Shares ETF (Ex-Australia) is another popular option for investors that want international exposure in their portfolios but want to keep an Australian Domicile.
Unlike VTS & VEU which are Domiciled in the US, VGS has an Australian Domicile this means things like Dividend Reinvestment Plans are available to VGS investors. There is also no time consuming paperwork that needs to be completed to invest in VGS.
There are some benefits to having VTS and VEU over VGS, this mainly revolves around the fact that you split out the US from the rest of the world and you can control your allocations a lot finer than having just one fund that tracks both of these.
We personally went for a Two ETF portfolio of A200 and VGS, click here to read why we decided that over the three ETF portfolio of VAS VTS VEU.
Is VEU Australian Domiciled?
No, unfortunately VEU and VTS are domiciled in the US. This isn’t a huge deal but will mean some features such as Dividend Reinvestment Plans are not available to Australian investors. You will also need to fill in extra tax forms to ensure you are not double taxed by the US government.
Is not having a Dividend Reinvestment Plan a big deal?
For most people this isn’t such a big deal as you are either taking your dividends and using them to fund your lifestyle or you are reinvesting them anyway. I personally love Dividend reinvestment plans as it acts as a way to supercharge your holdings without even having to think about it. It also saves on brokerage as you are not charged fees on these reinvested dividends.
How do I buy a VAS VTS VEU Portfolio?
As these three funds are ETFs you are able to purchase them through your chosen investment platform. We would recommend using Pearler as they offer some of Australia’s lowest fee brokerage and have some great features such as Automatic investing so you can really ‘set and forget’ your portfolio, leaving Pearler to do the heavy lifting for you. Click here to read out in depth review of Pearler.
How do I track my three ETF Portfolio?
We love to track the performance of our portfolio and would suggest using a platform such as ShareSight – this is by far the easiest way of tracking how your portfolio is going over the long term. The best part of this is that this service is free for accounts that have less than 10 holdings, so there’s no reason why you shouldn’t give it a crack. Click here to read our review of ShareSight.
In Summary
The Three ETF portfolio of VAS VTS VEU is a great option for long term investors that want to get exposure to the Australian, US and International markets. While there are some downsides such as not being able to access Dividend reinvestment plans and a little more paperwork, these are outweighed by the benefits of having this type of portfolio. We like the ease of use of having an all ETF core portfolio and by splitting it out into three regions you are able to change your exposure to certain markets over time.
If you would like to streamline your portfolio even further be sure to read our post about the Two ETF portfolio!
What do you think about the three ETF portfolio? Let us know in the comments below!