*Nothing written below is financial advice. Always do your own research when dealing with your finances

One ETF to rule them all?

The majority of the Australian FIRE community roughly subscribes to one of the three combos when it comes to ETFs:

40% Oz shares (VAS or AFI) 60% international (VGS or equivalent) Pros Great exposure to the entire world with enough Australian shares to take advantage of franking credits Don’t have to fill out a W-8BEN form every couple of years Hedged against the Australian dollar DRP option available

Cons Highest management fees (0.164% assuming the above weightings) out of all the three options (more on this later). Have to manually rebalance

40% Oz shares (VAS or AFI) 60% international (VTS+VEU) Pros Great exposure to the entire world with enough Australian shares to take advantage of franking credits Low management fees (0.101% assuming the above weightings) Greater diversification than the other two options exposure to emerging markets

Cons Extra admin to fill out W-8BEN form (less than one hour every few years) DRP option only available for VAS, not VTS or VEU Potential estate issues when you die for VTS and VEU units Have to manually rebalance

100% Oz shares – Dividend focussed (VAS or AFI) (Thornhill approach) Pros Take full advantage of our unique franking credit systems in Australia Dividends are less likely to be affected during a downturn Hedged against the Australian dollar Don’t have to fill out a W-8BEN form every couple of years Low management fees (~0.14%)

Cons Not diversified outside of Australia Miss out on international market gains Capital gains traditional low for this strategy Home bias



All three strategies have their merits but they all require rebalancing with the exception of an all Australian ETF. The issue with that strategy is, of course, you don’t have much diversification as Australia is only roughly 2 percent of the world economy. And with how much private debt Australians have right now… if Australia went through a recession the all Australian portfolio would not fare well.

The point is that each one of these strategies is missing something and require manual intervention whether it be rebalancing, extra admin work or more diversification.

Wouldn’t it be good if there was an ETF that took care of all this for you?

Vanguard Diversified ETFs

So what are they exactly and what’s the difference between buying this ETF vs one of the three options mentions above?

To put it simply, any of the four diversified index ETFs above offer a complete one stop shop solution for anyone looking to invest.

They solve a few problems that our three options above had

Diversification – Exposure to over 10,000 securities—in just one ETF.

Auto Rebalancing

DRP option

Hedged against the Australian dollar*

It wasn’t listed above as a con, but all four diversified index ETFs are actively managed using Vanguard Capital Markets Model (VCMM)

The two big ones that stand out are of course the auto-rebalancing but also maybe surprisingly the active management component.

Rebalancing is not hard to do, but it’s something that if left unattended can most certainly affect the performance of your portfolio over the long term. As for the active management component. You may be wondering why there is any management at all? I thought Vanguard is all about minimal management to keep fees low and it’s really hard to beat the index anyway??? I’m not sure about this part beating the market either but I guess we will have to wait and see how it performs. It uses a modelling system called VCMM to simulate potential outcomes and pick the correct balance for your desired portfolio out of the four options above.

*As pointed out by Chris in the comments. The diversified ETFs are not 100% hedged. Please check the PDS for each ETF to find the amount of hedging

Who Is This Suited For?

To be honest, it’s a bloody good product for 99% of people. What they are offering here is as close to the perfect ETF as I’ve ever seen given the management fees and what it offers.

The best thing about this ETF is how idiot-proof it is. A complete n00b could buy one of the four diversified ETFs (depending on their investor profile) for the rest of their life and get respectable returns with minimal effort.

People avoid things that appear confusing and hard. That’s why Robo investment companies like Acorns and Stockspot are in business. They essentially are providing what this ETF is providing at additional costs because they make investing super easy and friendly. With the other three options listed above, it can be daunting to explain to a complete n00b how to rebalance. As soon as they don’t understand something, the majority of the time they can get spooked and give up altogether.

That’s why this ETF is so special. You can confidently recommend this product to anyone and be sure that they can’t stuff it up or get confused.

Set up a broker account Buy this ETF when you have the money to do so Turn on DRP if you want Do tax when it comes around Repeat forever

So if this ETF is suited for 99% of people, who is the 1%?

Why I Won’t Be Switching To These ETFs

This is something I have been wanting to bring up for a while now.

Has the Australian FIRE community forgotten just how important management fees are?

I have been seeing a lot of people recommend VDHG, which as I have mentioned above is a fantastic product. No doubt about it.

The only issue I have is that at a MER of 0.27%, it’s more than double that of what my MER currently is (0.101% or option 2 above). They are both very low fees, but I plan to have a portfolio of a million+ within the next 5 years and hope to live for another 50 years at least! Now even though the management fees are very low, over a long period of time it does add up!

I have actually been working on a web app recently (so close to being published) that works out lost investment potential from management fees which gives you a visual of what I’m talking about.

Management fees are unavoidable, but how much you pay is your choice to an extent. I have calculated my current investment potential loss from management fees to be $48K over 50 years at $1M invested.

If I change the management fees to be 0.27% we get the following

Holy shit!

We went from paying under $50K over 50 years in investment potential loss from management fees to over 5 times that amount at over $250K!

Ok, I need to clear a few things up about the above graphs because it’s a big deal.

What am I actually talking about when I say investment potential loss? I’m referring to how much management fees are costing the investor when you factor in that the money paid to management could have been invested and compounded at 8% return (that’s what the graph is using as a return rate).

If I had $1M in my portfolio with my current weightings I would be paying Vanguard $505 a year. If I had $1M with any of the diversified index ETFs, I would be paying Vanguard $2,700 a year.

The difference between $505 and $2,700 a year over a lifetime adds up!

Conclusion

If you’re reading this blog, odds are you’re somewhat interested in personal finance and investing. The question you need to ask yourself is whether or not you are willing to learn, educate yourself and do the extra things required for the lower MER ETF options. Or if you think that the higher MER for the diversified index ETFs are justified. I personally choose to keep my MER as low as possible because paying less in management fees is a guaranteed return. You could argue that the diversified index ETFs will outperform my ETF combo but that is unknown without a crystal ball.

If you don’t know what half of the words in this article are even about, then the diversified index ETFs are most likely the best ETF for you. Just pick your investor profile and off you go. And don’t sweat the extra management fees. If the simplicity of the diversified ETF gets you into investing, you’ve more than made up the difference.