Buy and hold investors seeking long-term capital growth, some income, international diversification, and with a higher tolerance for the risks associated with share market volatility.Vanguard, VTS fund
This means Vanguard VTS is a great way that a smart investor seeking FI can start investing.
VTS is essentially a growth ETF, which aligns to the boglehead style of investing for growing capital value (share price). The ETF is not hedged (it is not treated like a hedge fund) meaning that it is exposed to the fluctuating values of US vs AUS dollar (but this isn’t important, and over time the costs associated with hedging funds tend to erode any benefit that the hedging provides).
The dividend or equity yield is currently at 1.86%. It’s nice to see the dividends hit your account, but it’s not really going to be enough to live off unless you have a significant holding.
VTS (ASX:VTS) currently manages (AUD) $1.7 Billion spread across 3,591 holdings, and its underlying US fund size is approximately (USD) $1.21 Trillion. Its top holding is Microsoft, followed by Apple and Amazon – as per the breakdown below. It offers exposure to some of the world’s largest publicly traded companies in the United States.
VTS offers what I have found to be the lowest MER of any stock market ETF. This is an ultra low MER of .03% or $3 per $10,000 invested per year. Currently the BlackRock iShares IVV Total US market fund is its closest competitor, charging a MER of .04% or approximately 30% more.
VTS is a cross listed fund, meaning it is not domiciled in Australia – this means you will need to fill out a W-8BEN-E tax form every three years. This is a relatively simple task that takes under 10 minutes and can be accomplished through the VTS share registry in Australia, Computershare. Computershare offer a detailed walk through, and individualised forms for personal investors, commercial investors and those investing through trusts such as family or discretionary trusts.
Vanguard manage VTS according to their three main priorities
Competitive long-term performance: Vanguard’s investment approach provides investors with an efficient way to capture long-term market performance.
Diversification: The Fund invests in a diversified portfolio of securities, which means the Fund is less exposed to the performance fluctuations of individual securities.
Low cost investing: The Fund has low ongoing fees as we strive to minimise the costs of managing and operating the Fund.Vanguard, VTS product statement
VTS has performed in line with the index since its inception. Check out Vanguard Investments.com for the most up to date information on this ETF.
Why I own VTS
The US makes up some 40% of the total world market and VTS allows me to own a slice of $1.7B of well known brands like Alphabet (Google), Amazon, Apple, Facebook, Berkshire Hathaway, Visa, Exxon Mobil and Microsoft for an ultra low cost. The ultra low cost of $3 per $10,000 invested means that for every fortnightly investment decision that I make on VTS means I am only paying about $1 per year in management fees. This means I am spending almost 10 times the management fee on brokerage, which is already at a rock bottom price!
VTS vs IVV
VTS is slightly cheaper than IVV, now sitting at a MER of .03% vs the IVV’s MER of .04%. However, IVV is an Australian domiciled fund, wheras VTS is just cross listed onto the Australian Stock Exchange. This means for VTS you will need to spend approx 10 minutes every 3 years filling out a W-8BEN-E tax form to hand to the American tax system to make sure you don’t get taxed twice.
Lets put this into perspective. With a $100K holding, IVV is going to cost you $120 in management fees for every three years, wheras VTS is going to cost you $90. I am most certainly happy to save $30 by selecting VTS, and spending 10 minutes filling out the W-8BEN-E form. We are talking about very small amounts of money spent on management fees here.
The funds whilst very similar are not identical, and are managed ever so slightly differently. Check out the video below for more information, but don’t get analysis paralysis – I own both funds, and I simply buy which ever one has gone down more (but this tends to all even out long term). If they are the same and I had to choose I pick VTS due to the lower management fee.
In summary, I like VTS. I own shares in this ETF because I want to diversify from purely Aussie shares, and I am happy to accept the income drag that this produces, in order to accept global diversification and long term capital gain. It’s important that you do your own research and know what you’re comfortable with. Do you own VTS or a US index fund? Let us know in the comments below!
Get FI !
Epilogue: 27th April 2020: I have since sold my holdings of IVV, and now purely invest in the Vanguard VTS ETF for exposure to US stocks