When it comes to investing in ETF’s it can sometimes get overwhelming as there are so many options to choose from. Two of the most popular choices in the Vanguard lineup are the VGS and VTS ETFs. Both of these are really titans in their own class and both have their pros and cons, so how do you decide which is best for you? In this blog post, we will compare the two funds and help you decide which is right for your portfolio!
Vanguard Company Profile
Jack Bogle, founder of Vanguard and legendary investor really revolutionised the investment world with his idea that index investing could be cheaper and more effective than actively managed funds. His belief has led Vanguard to become one of the largest ETF providers in the world, with over 7 Trillion dollars (USD) in assets under management.
Vanguard’s passively managed ETFs have been able to outperform fund managers almost 100% of the time. This is a testament to Jack Bogle’s vision and the effectiveness of index investing.
If you’re looking to invest in ETFs, Vanguards ETF selection is a great place to start. With a wide range of ETFs to choose from, Vanguard can help you reach your investment goals. And with John Bogle’s history of success, you can be sure that Vanguard will continue to provide quality investment options for years to come.
VGS Overview
Vanguard MSCI Index International Shares ETF (ASX: VGS) is a global ETF that seeks to track the return of the MSCI World Index excluding Australia. Being a global ETF that excludes Australia means that as an investor you are able to keep your Australian investments separate and not ‘double up’ by having them in this ETF as well. Say you invest in A200 or VAS, you wouldn’t want your exposure to the global market to include shares that you already own. In saying that due to its market-weighted nature VGS tends to favour the US stocks instead of smaller markets like Australia.
If you are after global diversity this ETF gives investors access to over 1400 underlying stocks in one trade, which really does take portfolio diversity to the next level.
Vanguard MSCI Index International Shares ETF seeks to track the return of the MSCI World ex-Australia (with net dividends reinvested), in Australian dollars Index, before taking into account fees, expenses and tax.
Vanguard
When we look at these broad based global ETFs there is normally a trade off between diversity and management fees. What is surprising about VGS is the very reasonable management fee of 0.18% Per Annum. To put this into context for every $10,000 invested in VGS it will cost you $18 per year in fees.
VTS Overview
The Vanguard US Total Stock Market ETF (VTS) is an index fund that tracks the performance of the entire U.S. stock market. VTS has been one of the most popular and well-known ETFs on the market since its inception in 2009. Currently VTS is entrusted with over $3 billion in assets under management.
If you are after an ETF that tracks the total US market instead of just a singular market such as the NASDAQ then VTS could be a great option for you. VTS gives you access to over 4000 underlying stocks with 28.4% of the fund invested in US Tech stocks such as Apple, Tesla, Microsoft, etc. there is a heavy sway towards tech stocks.
The ETF provides exposure to some of the world’s largest companies listed in the United States. It offers low-cost access to a broadly diversified range of securities that allows investors to participate in their long-term growth potential. The ETF is exposed to the fluctuating values of the US currency, as there will not be any hedging to the Australian dollar.
Vanguard
VTS is a very affordable low-cost ETF with an expense ratio of only 0.03% per annum, which means for every $10,000 invested in VTS you will only be paying $3 per year. This makes it one of the most cost-effective options available for investing in the U.S. stock market.
One downside of VTS is that it is Domiciled in the US, this means that the stock is based in the US for tax purposes and you will have to fill out a W-8 BEN tax form. This mitigates being taxed twice on your investments, once by Uncle Sam and once by the ATO. Whilst this is not a major issue to fill out – having an ETF that is domiciled in Australia is definitely an easier option.
Performance
One of the key metrics we need to look at when comparing these two ETFs is the overall performance of both funds.
Since its inception, VTS has had a stellar performance and has returned roughly 16.3% per annum. As shown in the Sharesight Share Checker above you can see that if you had invested $10,000 in 2009 when the fund began you would currently be sitting on a nice little nest egg of over $50,000. Normally we would recommend a dividend reinvestment plan to really supercharge your wealth but unfortunately due to VTS being a cross-listing you are not able to enroll in a dividend reinvestment plan.
VGS on the other hand has provided a lower return to investors since inception of 13.8% per annum. One thing to note is that VGS is 5 years younger than VTS so there is always going to be a difference. If we look at a smaller time frame of say 5 years we can see that the returns are only 2% different between the funds. If you had invested $10,000 into VGS in 2014 you would currently have over $20,000 in your brokerage account. Once again you need to take into account the extra 5 years in compounding that VTS gains over VGS.
Dividends
Both VGS and VTS pay Quarterly dividends. Neither of these stocks are huge income stocks compared to Aussie ETFs like ASX tracking funds A200 or VAS. Yields on both funds are less than 2% which is to be expected with such broad focus funds. As mentioned if you are investing in VTS you will not have the option to take your dividend as more shares through a Dividend Reinvestment plan as the fund does not allow for this. On the Flip Side as VGS is domiciled in Australia you are able to reinvest your dividends which will help grow your portfolio quicker and turbocharge your wealth.
Key Differences between VGS vs VTS
As you have probably noticed by now there are some key differences between VGS and VTS that may make you lean towards one over the other.
- VTS invests just in US stocks where as VGS invests in a basket of global stocks from many different countries.
- Management fees of VGS are higher at 0.18% per annum ($18 per $10,000 invested) compared to VTS at 0.03% per annum ($3 per $10,000 invested)
- VTS does not allow for dividend reinvestment due to it being a cross listed stock.
- VTS is not domiciled in Australia meaning that extra paperwork will need to be filled out for tax purposes.
Frequently Asked Questions
Which Global ETF Is Best?
Well that’s a tough question, I think that VGS is a great option for a one stop shop if you already own an australian based ETF like VAS ad would like to get exposure to a little bit of everything worldwide. Just remember that VGS does not include Australia so you will need to add an ETF like VAS or A200 to get exposure to the local market.
If you are after a truely singular investment that gives global exposure you will need to look at a fund such as Vanguards VDHG.
I think that holding a trio of ETFs might be the best option for a diversified global portfolio. VTS combined with VEU and VAS would fit this hypothesis really well and is a popular way of getting the exposure you want.
Does VGS Pay a Dividend?
Yes VGS does pay a dividend but you need to note that these are not primarily dividend focused income ETF’s they are more focused on capital growth. VGS does also allow for dividend reinvestment which can really supercharge portfolio growth.
Is VGS Better than VTS?
Better is a very broad term, you need to take a look at your investment goals and your appetite for risk before deciding between these two funds. If you are after exposure to a more global portfolio then VGS is definitely the way to go as you not only get exposure to the US but you get exposure to many other markets around the world. VTS is solely based on the US stock markets, so if you are after a diversified ETF that focuses on that market then VTS can definitely be a great option.
Is VTS a Good Investment
Similar to the above question, VTS is a great Vanguard fund but it is US centric. If you are looking to diversify your portfolio of ETFs and add some exposure to the US market then yes VTS is a good investment.
Are ETFs Good for Beginners?
ETFs are not only good for beginners but they are good for everyone if they fit into your investment style and goals. There are so many different ETFs available that everyone should be able to find one that fits their profile and risk tolerance.
How Do I Buy VGS or VTS?
You can purchase VGS or VTS through any investment platform. Our preffered online investment platform is Pearler, this is by far the most feature packed yet simplistic platform we have used. With flat rate brokerage at $9.50 per trade no matter the size you can’t go wrong! Click here to read more about Pearler.
How Can I Track the Performance of My ETFs?
Having investments in ETF’s is great but you should always be sure to track their performance. The easiest way we have found is to track them with Sharesight. Sharesight allows you to track all of your investments in one spot and keep oversight on your wealth. Be sure to check out our review to learn more.
Conclusion
All in all both of these ETF’s are great options for those looking to get global exposure in their portfolios. VTS is more US centric while VGS offers a little bit of everything but still with a sway towards US Stocks. Management fees are quite reasonable for both funds but VGS has the advantage of allowing for dividend reinvestment. Performance on both funds has been solid over the past 5 years and we expect to see good things from both funds in the future.
I think the best option for creating a global portfolio would be to utilise a Three ETF portfolio including VTS, VEU and VAS. This gives you exposure to a more targeted portion of shares in the US and Australian market while still giving exposure to global shares through VEU (Global Share Excluding US).