In this exploration of Australia's DIY Financial Freedom Community, we will delve into the realm of simplified investing, particularly focusing on the 'all-in-one' approach embodied by funds like the Vanguard Diversified High Growth Index ETF (VDHG) and the BetaShares Diversified All Growth ETF (DHHF). These investment vehicles, offering access to thousands of individual investments globally, have revolutionized the landscape by introducing a streamlined, low-maintenance alternative to traditional investing. From examining the 'ETF of ETFs' model and the benefits of multi-asset ETFs to comparing VDHG and DHHF across their shared characteristics and unique distinctions, this article is set to provide an insightful journey through these popular tools for financial freedom.
Simplifying Your Investments: The All-in-One Approach The concept underpinning this ETF is akin to a well-stocked marketplace, serving as a 'one-stop shop' for investors seeking a broadly diversified passive investment with minimal upkeep requirements. It is hard to find a single investment that matches the degree of diversification provided by the Vanguard Diversified ETF series. According to Vanguard, investing in VDHG equates to exposure to over 16,000 individual investments worldwide.
Making an investment decision is no easy task, with countless options to ponder - stocks, property, or bonds? Big-name corporations like Apple, burgeoning technology giants like Tencent, or mining companies like Pilbara Minerals? Or perhaps you're pondering the worth of bonds for young investors? This is where multi-asset ETFs step in, delegating the reins of asset allocation to simplify the investment process.
These funds amalgamate various growth and defensive asset classes into a single investment product. They're designed to accommodate different risk profiles, not dissimilar to products offered by superannuation funds. Such convenience has led to their popularity, with the Vanguard Diversified High Growth ETF growing to nearly $2 billion in size since its launch in 2017.
The Unique Potential of 'ETF of ETFs' While the standard practice of most index ETFs on the ASX involves tracking a single index, such as the S&P/ASX 200 Index (e.g. VAS, A200 or IOZ), Vanguard's Diversified High Growth ETF (VDHG) takes a unique approach. Instead of adhering to a single index, it incorporates a variety of Vanguard ETFs, functioning as an 'ETF of ETFs'. This characteristic makes it a distinctive option among the ETFs that Vanguard offers.
VDHG isn’t Vanguard’s only diversified ETF option, they also have ready-made portfolios for Conservative, Balanced and Growth investors. Each Vanguard ETF represents a risk level an investor may be comfortable with. For instance, the Vanguard Diversified Conservative Index ETF, VDCO, leans more towards bonds and fixed interest investments (70%), offering a more suitable option for risk-averse investors.
The King of the diversified ETFs, Vanguard High Growth ETF, as the name suggests, leans towards the higher end of the risk spectrum. Comprising seven other Vanguard index funds, it spans a diverse range of assets, including Australian shares, international shares (both hedged and unhedged), Australian bonds, international bonds, emerging markets, and international small companies. As an investor, you gain exposure to a proportionately weighted mix of assets, with 35.75% allocated towards Australian shares and approximately 42% directed towards international shares. Additionally, 6% and 5% are apportioned to small companies and emerging markets, respectively, with the final 10% allocated to bonds and fixed-interest investments. This totals 90% growth assets and 10% defensive assets.
The Case for Multi-Asset ETFs Investing in a multi-asset ETF provides several potential advantages:
Risk Diversification Investing in a single asset class or specific sectors can expose investors to increased risk. With the Vanguard High Growth ETF, the risk is spread across various asset classes and sectors, reducing the impact of a single poor-performing investment.
Convenience Managing a diverse portfolio can be time-consuming and complex. However, a multi-asset ETF provides a simple way to access a range of investments. By purchasing shares in a single ETF, investors can achieve broad market exposure without the need to manage individual securities.
Low Costs ETFs are known for their relatively low expense ratios compared to other managed funds, and multi-asset ETFs like VDHG are no exception. By using ETFs as building blocks, these funds can leverage economies of scale and pass cost savings on to investors.
Flexibility and Liquidity Like any ETF, multi-asset ETFs can be bought and sold on an exchange at market prices throughout the trading day. This offers a degree of liquidity that isn't available with some other types of managed funds, which may only allow transactions at the end of the trading day at net asset value.
A Contender Appears - BetaShares Diversified All Growth ETF (DHHF) As the world of ETFs expands, investors seeking diversified high-growth exposure are no longer limited to one fund. A true competitor to the Vanguard Diversified High Growth Index ETF (VDHG) is the Diversified All Growth ETF (DHHF). Although the two funds share some similarities, they also exhibit distinct differences that could significantly affect an investor's returns.
The Common Ground Between VDHG and DHHF Let's start by outlining their shared characteristics:
Objective and Strategy: Both funds seek to provide investors with long-term high growth. They follow a passive investment approach, chiefly investing in a diverse range of other ETFs for expansive market coverage.
Diversification: Both VDHG and DHHF offer extensive diversification, enabling investors to tap into a mix of large, mid, and small-cap equities across global developed and emerging markets.
Equity Concentration: Both funds heavily favour equities. VDHG allocates 90% of its exposure to equities, and DHHF allocates 100% of its portfolio to equities.
Distinguishing Between VDHG and DHHF While both funds have a common objective, the way they pursue this goal varies, particularly in terms of asset allocation and expenses:
Diversification: With its 7 underlying ETFs, Vanguard's Diversified High Growth Index ETF presents a higher level of diversification than BetaShares Diversified All Growth ETF, which comprises only 4 ETFs. While Vanguard grants access to a broad spectrum of asset classes such as bonds and fixed income, BetaShares' focus is mainly on local and international equities, with nearly negligible holding in cash.
Size: DHHF is nearly 10 times smaller than its more mature competitor VDHG. DHHF has $239M invested, compared to $1.98 Billion in VDHG.
Expense Ratio: The funds' expense ratios differ, with VDHG charging 0.27% p.a. and DHHF featuring a lower fee of 0.19% p.a. This distinction alone could influence long-term investment returns.
Performance Snapshot (As of 30 April 2023) Delving into the performance of both funds, there are some noteworthy observations:
Calendar Year Returns: DHHF has outperformed VDHG in the year-to-date returns and for 2021. However, in 2020, VDHG delivered a higher return.
Risk Metrics: As of 30 April 2023, DHHF has shown a higher alpha and a lower beta, suggesting lower volatility relative to the market when compared to VDHG. DHHF also showcases a higher Sharpe Ratio, indicating better risk-adjusted performance.
As always, it is important to remember that past performance is not indicative of future performance, so the above results are merely a picture of how these funds fared in the past. Both the Vanguard Diversified High Growth Index ETF and BetaShares Diversified All Growth ETF offer quarterly distributions to unitholders, albeit the amount and timing of distributions will vary from period to period, and there may even be periods where no distributions are made.
Wrapping Up In conclusion, both VDHG and DHHF present compelling investment opportunities for those seeking high growth. While they share a similar investment strategy, the subtle differences in diversification, expense ratio, and performance characteristics could influence the choice between the two. Depending on an investor's specific objectives, risk tolerance, and market preferences, one may be more suitable than the other.
Investing is not a one-size-fits-all process. It demands thorough research and thoughtful decision-making. Whether you lean towards the well-rounded VDHG or the equity-focused DHHF, ensure that your choice aligns with your financial goals and risk appetite. Investing wisely today could mean flourishing financially tomorrow.
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