Last week Vanguard announced two new diversified ETFs, the Vanguard Diversified All Growth Index ETF VDAL and Vanguard Diversified Income ETF VDIF. Both are part of their ready-made diversified funds range.

At Morningstar, we are strong advocates for understanding an investment, and how it connects to your financial goals. This article will explore the two new offerings and the investors that they may suit.

The Vanguard Diversified All Growth Index ETF VDAL

This ETF is 100% in growth assets, offering exposure to more than 6,000 equities listed across over 50 global markets, including Australian equities, global equities, emerging markets and global small caps. Its fee is 0.27% p.a. and Vanguard believes that investors should consider this product if they have a time horizon longer than 7 years.

VDAL is an “ETF of ETFs” which means it is made up of several underlying ETFs. This is a newer approach to Vanguard’s ETFs, which traditionally invested in managed funds for the underlying assets. Some retail investors steered clear of Vanguard’s multi-sector ETFs, arguing that investing in funds lands them with unnecessarily high tax bills and drags on long-term performance.

An example is Vanguard’s Diversified High Growth ETF VDHG. Vanguard’s decision to construct VDHG out of unlisted managed funds forced investors to pay the taxman and lose out on compounding. Starting July 1, VDHG will use ETFs, instead of unlisted funds.

These ETFs also use the new approach, investing in ETFs instead of funds.

Let’s go down a level. There are 5 building block Vanguard ETFs in VDAL.

What you will see though, is that the funds are still listed in the Product Disclosure Statement (PDS) as the underlying funds. When Vanguard were questioned on this decision, they responded that ETFs are always the preference. However, funds are included for flexibility. When asked what circumstances in which these funds would be used instead of ETFs, they responded that it may be required to use the managed funds early in the product’s life due to minimum block trade requirements for listed securities. Another instance in which funds may be used is if there were circumstances during which trading via the ASX is suspended.

The important point to note here is that ETFs are the preference, and will result in better investor outcomes than the previous structure.

Vanguard Diversified Income ETF VDIF

VDIF is focused on assets that generate income and has a targeted split of 60% growth assets and 40% defensive assets. It aims to provide income to investors while remaining diversified by investing in 12,000 securities. Underlying assets include investment grade fixed income, corporate bond strategies and high dividend yield equities. VDIF’s fee is 0.32% p.a. and Vanguard suggests investors have at least a 6 year time horizon to invest.

A simplified approach—multi-asset offerings

There are some investors that enjoy the deep dive into financial reports, revel in the anticipation for earnings season and have excel spreadsheets they visit multiple times a day. There are others that treat investing as a necessary action to protect and grow their wealth and just want to simplify the process as much as possible.

The good thing about capitalism is that it caters to consumer demands and wants. We’ve seen different investment products pop up recently that cater to the crowd that want to invest but want to outsource most of the process. Diversified multi-asset ETF offerings like these two new ETFs cater to this crowd.

Regardless of which camp you sit in, there is something to be said for a simplified portfolio.

More complex portfolios make you more likely to tinker and overtrade—over monitoring and trading can lead to detrimental outcomes to investor’s portfolios. This has been demonstrated in our ‘Mind the Gap’ study, that looks at the difference between investment and investor returns.

The study has been conducted annually since 2010 and quantifies the impact of investor behaviour on investment returns. The study shows that more volatile funds had larger gaps. And this correlation makes sense. When there’s volatility, it causes fear and nervousness in investors and leads to redemptions as investors try to avoid more pain.

Investors who do not want to build a portfolio from scratch must walk a tightrope between scalable investment solutions and portfolios customised for their goals.

They face the further complication of managing a suitable asset allocation strategy within the constraints of investment amounts and brokerage. This is especially a problem for investors with smaller balances. Ending up in a situation where you’re investing $500 a month across 5 ETFs and 3 equities is not conducive to achieving strong investing outcomes. Ultimately, every investor’s situation is unique, and there’s no one size fits all answer.

This does not mean that there aren’t ways to simplify investing.

The portfolio construction process can be broken into blocks instead of individually seeking out exposure to asset classes. As a cook, this would be the equivalent of pasta sauce from a jar, but adding depth with sofrito, and salt and pepper (and maybe chili) to your liking.

The technical term for this is a core-satellite portfolio. I’ve written on how this strategy can be harnessed by investors.

This strategy was theorised before the investment industry evolved to offer retail investors so many multi-asset options.

Core-satellite portfolios revolve around the premise that passive investments can do most of the heavy lifting. They make up the ‘core’ of your portfolio. The ‘satellite’ is where you concentrate exposure in attractive opportunities. This is where you are taking active ‘bets’ that you think will add value.

The industry provides ready-made cores that help investors with lower balances that can’t diversify as easily. These multi-asset investment products are diversified across a range of assets in a single investment vehicle.

One downside of these “set and forget” portfolios is that it makes it a bit harder if you need to switch your asset allocation as the need arises. Rather than simply putting new contributions into under-represented asset classes to alter your overall allocation, you only have one option. This option is to switch the whole asset allocation into a different risk profile.

This often results in a taxable event and impacts your investment returns.

There is no free lunch. Everything that’s worth doing in life requires effort.

Although there are some simplified solutions that investors can look at for their portfolios, they still need work. Monitoring and maintaining portfolios across long time horizons is needed to ensure they are still fit for purpose. For example, investing in a 90% equity portfolio at year 1 of a 25-year time horizon will not be the right investments at year 24.

Multi-asset vehicles are a great way to simplify investing or as a jumping off point for new investors.

The good thing about investing is that there are a multitude of products, platforms, strategies and avenues to find an approach that is right for you.

Simplifying your portfolio to one ETF might not be the right strategy for you due to the inflexibility of the asset allocation which will not shift as your risk capacity changes over time. The right balance between simplicity and customisation may evolve over time depending on your interest in investing, and the needs of your portfolio.

Ultimately, the goal is to invest. Multi-asset investments can provide solid, pre-diversified building blocks for investors that have no interest in picking individual securities.