There are 6 Vanguard ETFs that receive a top Medallist rating of Gold from our manager research analysts. These ETFs can help investors get exposure to key assets classes as part of a diversified portfolio.

Vanguard Australian Fixed Interest ETF (ASX: VAF)

Vanguard Australian Fixed Income is an outstanding choice that provides diversified Australian bond exposure at a competitive price, particularly with the recent fee cut on the exchange-traded share class. The Bloomberg AusBond Composite 0+ Yr Index is representative of the overall opportunity set, a great fit as a foundational building block for one’s fixed-income exposure.

Portfolio manager Oldrich Klima and the supporting team at Vanguard have reliably replicated the underlying benchmark characteristics with a narrow tracking error. Historically, the fund returns have carried higher sensitivity to interest-rate changes owing to the portfolio’s higher duration relative to the average peer. The higher duration can be attributed

to the substantial allocation to long-term government and semigovernment bonds, which accounted for more than 90% of the total exposure as of 31 May 2023. The remainder of the portfolio mostly consists of corporate bonds and supranational securities.

Thus, credit risk has remained fairly modest. In general, active managers possess the flexibility to adjust to interest-rate changes, whereas passive investments are bound to the benchmark with minimal control over their risk profile. For instance, the period of rising interest rates through 2021 and 2022 was favourable for active managers to showcase their abilities. However, over the long term, few are able to beat the benchmark consistently.

The fund can functionally play the role of a defensive buffer, damping the volatility of equity investments in one's total portfolio. A high-duration portfolio aided the fund over the sustained decline of interest rates over the past decade. Also, high exposure to government securities in lieu of lower credit exposure enabled it to outperform its peers during stressful periods such as the first quarter of 2020. We have conviction in the fund's ability to outperform the Morningstar Category average over longer time horizons.

Considering its investment merits and cost efficiency, the strategy is one of our top picks within the Australia fixed-income space.

Vanguard Australian Property Secs ETF (ASX: VAP)

Vanguard Australian Properties Index strategy is a highly efficient approach to gain access to the domestic listed property sector. The index covers a wide opportunity set, making this strategy one of our top picks in the Australia real estate Morningstar Category.

The Australian REIT market is narrow, with just 45 listings on the ASX as of September 2023. Given the limited playing field, few active strategies are able to differentiate themselves and outperform the benchmark, thereby making the appeal of passive strategies strong in this market segment. The Vanguard strategy offers passive exposure to the A-REIT sector by fully replicating the S&P/ASX 300 A-REIT Index. Of the 45 listed A-REITs, the index has 31 constituents with a market cap coverage of over 95%.

The index provides meaningful diversification relative to other sector indexes, but it does carry a fair degree of stock-level concentration. As of August 2023, the portfolio has 31 constituents, with the top 10 holdings accounting for more than 80% of the portfolio assets.

The portfolio concentration implies that a significant corporate action or a firm exiting the underlying index could cause notable portfolio shifts. The strategy’s passive nature does not explicitly offer any downside protection in such events. That said, even active strategies do not allay concentration risk meaningfully as they do not stray far from the index, leading to narrow levels of return dispersion within the category. This further boosts the appeal of passive strategies.

The strategy’s low management fee makes the overall holding cost of the strategy very attractive. Its scale is advantageous for trading efficiencies and cash flow management. In totality, the combination of Vanguard’s leadership in index management and the suitability of an index approach for A-REIT exposure makes for an investment case, earning our highest conviction in the strategy.

Vanguard Etclly Cons Intl Shrs ETF (ASX: VESG)

Vanguard Ethically Conscious International Shares ETF offers investors an attractive route to global equity markets with a focus on environmental, social, and governance criteria, all for a remarkably low fee. This strategy is increasingly favored for its potential to outperform peers over the long term, reinforcing its position as a top choice for ESG-centric global equity investment. By mirroring the FTSE Developed ex Australia Choice Index, an ESG-tailored benchmark, it poses a significant challenge to active managers that are aiming to exceed its risk/reward profile.

The underlying index’s ESG approach is exclusionary, yet the portfolio is well-representative of the market-cap spectrum of the world large-blend equity Morningstar Category. The ESG overlay results in dropping around 400 securities from the parent index, but pleasingly the portfolio still comprehensively captures the opportunity set available to active peers.

The underrepresented sectors in the Australian share market, such as IT and healthcare, are well represented in this strategy, with combined exposure standing at 47% as of December 2023. This makes the strategy a suitable diversifier for a local equity allocation. The risk/reward drivers of the portfolio largely resemble the broad-market index. So, for better or worse, the strategy should exhibit the key characteristics of the general global market performance, although occasional deviation in performance on account of the ESG overlay is expected. For instance, as technology names rallied last year, the fund outperformed the MSCI World ex Australia Index category benchmark by 3.4%.

In conclusion, this exchange-traded fund is a top choice for ESG-focused global equities, offering low fees, broad diversification, and strong performance potential, making it an effective option for investors prioritizing ESG criteria.

Vanguard MSCI Intl ETF (ASX: VGS)

Vanguard MSCI Index International Shares ETF provides Australian investors with an affordable and efficient gateway to the global equity markets. This exchange-traded fund (VGS) and its AUD-hedged version (VGAD) mirror the MSCI World ex Australia Index (and AUD Hedged version for the hedged class), incorporating net dividends reinvested, setting a challenging benchmark for active fund managers to surpass. With its low expense ratio and Vanguard's expanding scale, the strategy presents a formidable challenge for active managers to beat.

The underlying index has universal appeal for constructing a diversified portfolio that spans 22 developed economies represented by approximately 1,500 holdings. The index is skewed toward the United States (a common feature across most global indexes) but given the majority of its holdings are multinationals earning sizable revenue from international markets, concentration is not a notable risk here.

The strategy will wax and wane with the index and is chained to its notable biases. Of late, it has faced intense competition from skillful active managers who, with their enhanced risk-management skills, can weather the market volatility better to beat the index. However, in terms of long-term performance, Vanguard edges past most managers in the cohort. The vehicle may receive currency diversification benefits from investing internationally as the currency is not hedged to AUD, but for those who are currency risk-averse, the AUD-hedged version is also available at a modestly higher price.

In summary, Vanguard MSCI Index International Shares ETF stands out as a best choice for Australian investors seeking global market exposure. Its cost efficiency, broad diversification across multiple developed markets, and solid performance record, especially in a competitive landscape with skilled active managers, highlight its appeal.

Vanguard MSCI International SC ETF (ASX: VISM)

For Australian investors seeking cost-effective and efficient exposure to the global small-cap markets, Vanguard's MSCI International Small Companies Index stands as an excellent option.

The global small-cap market is a broad and heterogeneous opportunity set. It is fraught with many incoherent idiosyncratic risks fostering inefficiencies, which has empirically led to a wide return dispersion. Conventionally, these attributes would make any market segment a mecca for an active approach to generating significant alpha. But in reality, the evidence points to the contrary.

The risk/reward fragmentation in the global small-cap landscape has been a demanding segment for active strategies. The two primary challenges here are the extensive opportunity set and generally uncorrelated diverse risk elements present in the market. Specifically, for actives, the Achilles' heel is scale rather than skill. An average active manager lacks the scale to deploy cross-sectional analysis weighing up both opportunities and threats at the global level across the different sectors and countries, putting them at a disadvantage relative to passive managers.

The Vanguard MSCI International Small Companies Index strategy remains a standout option in the global small-cap universe and as such is an outstanding investment choice for navigating the global small-cap space.

Vanguard US Total Market Shares ETF (ASX: VTS)

Vanguard Total Stock Market funds offer highly-efficient, well-diversified and accurate exposure to the entire U.S. stock market, while charging rock-bottom fees—a recipe for success over the long run.

The funds track the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. opportunity set. The index weights constituents by market cap after applying liquidity and investability screens to ensure the index is easier to track.

The index includes small- and micro-cap stocks, which improve the end portfolio’s diversification and can provide a performance edge when small caps rally, as they did in the fourth quarter of 2020. They tend to be more volatile than large-cap stocks but have minimal impact given that they make up less than 10% of the portfolio.

As of November 2023, the top 10 holdings made up the largest portion of the index (27%) since its 2011 inception. Likewise, the 28% allocation to tech stocks was the highest over the same period. But this is not a fault in design: The CRSP US Total Market Index simply reflects the market’s composition. In the long run, its broad diversification, low turnover, and low fee outweigh these risks.