Vanguard's suite of multisector ETFs bags four Morningstar golds
Vanguard’s ultra-cheap ETFs are a sound option for diversified coverage, says Morningstar’s Donna Lopata.
Mentioned: Vanguard Diversified Balanced ETF (VDBA), Vanguard Diversified Conservative ETF (VDCO), Vanguard Diversified Growth ETF (VDGR), Vanguard Diversified High Growth ETF (VDHG), Schroder Real Return (Managed Fund) (GROW)
Vanguard's low-cost suite of multisector exchange-traded funds has secured four Morningstar gold ratings, with analyst Donna Lopata describing them as an "exceptional suite of listed multisector strategies".
The four diversified options are:
- Vanguard Diversified High Growth ETF (VDHG) – 10/90 income/growth
- Vanguard Diversified Growth ETF (VDGR) – 30/70 income/growth
- Vanguard Diversified Balanced ETF (VDBA) – 50/50 income/growth
- Vanguard Diversified Conservative ETF (VDCO) – 70/30 income/growth
They took home the gold thanks to their rock-bottom fees and simple yet effective approach portfolio construction, Lopata says. Each product is designed to suit different investor objectives and risk profiles.
"What makes this series of diversified strategies so appealing, is its low cost and sensible portfolio construction," Lopata says.
"Vanguard charges 0.27 per cent annually for VDHG, VDGR, VDBA and VDCO, making them the cheapest multisector ETF in Australia.
"Alternative assets are avoided, instead relying on domestic and global equities, fixed interest, and cash. This approach has been effective, and its comparative simplicity stands out against the complex and hard-to-time dynamic and tactical allocations that also share this category."
Lopata says Vanguard's multisector ETFs have also managed to trade with low big-ask spread of 10-25 basis points. This is in line with the equivalent unlisted funds and considerably below actively managed multisector exchange-traded products from AMP and Schroder - AMP Capital Dynamic Markets Fund (DMKT) and Schroder Real Return Fund (GROW).
Vanguard’s tighter spreads are to be expected given index holdings and weightings are known continuously for the market maker, Lopata says.
However, there have been a few concerning price spike incidents. For example, on 6 September, 2018 for three minutes the market maker had technical difficulties. VDHG's traded price jumped 450 basis points.
Vanguard stresses the importance of using the estimated intraday net asset value found on its website and trading with limit orders. It also recommends trading after 10.15am and before 3.45pm for price discovery to be established by the market.
Vanguard’s multisector ETFs were launched in November 2017 and broadly mirror its equivalent unlisted fund range. Assumptions are updated quarterly but asset-allocation changes have been infrequent.
The methodology consists of a top-down hierarchy that starts by defining investment horizons for each portfolio and allocated broad-asset class exposure such as equities and fixed income based on the income/growth split. It invests in a range of Vanguard funds including:
In 2017 Vanguard reduced home-country bias by allocating notably more to international equities than peers. Australian equities are still over-represented compared with global market share and partial hedging mitigates currency risk without eliminating potential benefit.
Today, the firm manages about $14.6 billion in pooled multisector fund assets including unlisted retail, unlisted wholesale, and ETF offerings, as at June 30, 2019.
VDHG is the most popular among the four multisector strategy ETFs with $177 million under management, followed by VDBA ($136.39m) and VDGR ($136.33m).
Vanguard Diversified High Growth ETF (VDHG) - portfolio holdings at 6 August 2019
Source: Morningstar