Review of Vanguard FTSE Emerging Markets Shares ETF (ASX:VGE) ETF from a long term index investor.
The Vanguard FTSE Emerging Markets Shares ETF (ASX:VGE) seeks to track the return of FTSE Emerging Markets All Cap China A Inclusion Index (with net dividends reinvested). VGE holdings are mostly in technology, financials, and consumer discretionary, with most of the market allocation based in China and Taiwan (over 50%). In this VGE review I’ll go through how this ETF is structured, its performance and answer the question about whether I would hold VGE myself.
“Around thirty years ago, emerging markets made up about 1% of world equity market capitalization, and just 18% of global GDP. However, today the story is much different, with EM now representing nearly 60 percent of global growth and more than 50 percent of global GDP”SGH.com
- Emerging market diversification
- Mix of Technology, Financials, Consumer, Materials, Industrials, Energy and healthcare
- Companies from 19+ emerging markets
- Higher MER than other ETFs at 0.48%
- Concentration in China (34%) and Taiwan (20%)
- Emerging markets come with risk i.e. poor regulation in those countries can make investor or corporate fraud easier.
- Emerging markets typically have weaker economies
Verdict: VEU provides “low-cost” exposure to companies in emerging markets for a MER of 0.48%. China (34%) and Taiwan (20%) which makes up the majority, and other emerging markets included are India (15%), Brazil (6%), South Afria (4%) and Saudia Arabia (4%). Major companies held include Taiwan semiconductor, Tencent and Alibaba.
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 minimize the costs of managing and operating the Fund.”Vanguard
The Vanguard FTSE Emerging Markets Shares ETF (ASX: VGE) is currently managing approximately AUD$640 million across more than 5,300 holdings, and it is known as one of the best Vanguard ETFs. VGE trades under the ASX code of “VGE” and AU000000VGE8 ISIN code. The total fund size of which the underlying ETF is from is actually $148.4 Billion, which has been around since March 2005.
Since its inception in November of 2013, the availability of this fund as the Vanguard FTSE Emerging Markets ETF VEU, has shown a reliable performance and continues being an excellent value as it has a management fee of 0.48% p.a. with no additional costs. It trades on the Australian Securities Exchange (ASX) among other Vanguard Emerging Markets funds. Therefore, it is fully regulated, and reports are available on their website.
Vanguard FTSE Emerging Markets Shares ETF is par of Vanguard FTSE Emerging Markets funds, which offer an efficient way to capture market performance with a diversified portfolio of securities while reducing costs.
The NAV price of the Vanguard FTSE ETF is updated daily. However, the pricing is quoted continuously on the ASX AQUA market. Additionally, fund distribution is done quarterly: in March, June, September, and December. The ETF trades in units with a $50 transaction cost applied for redeeming the VGE unit.
Market allocation and sectors
Most of the market allocation is in China (42.5%), followed by Taiwan (16.5%) and India (11.0%). The rest of the allocation is distributed across several other emerging regions as part of the Vanguard FTSE Emerging Markets diversification strategy.
Note that as of March 2022, these weightings have changed slightly with the more recent data showing the larger ETF weightings as China (34%) and Taiwan (20%) which makes up the majority, and other emerging markets included are India (15%), Brazil (6%), South Afria (4%) and Saudia Arabia (4%).
When looking at the sector allocation for the Vanguard FTSE Emerging Markets Shares ETF, we can see a strong weight on technology (24%), financials (19%), followed by consumer discretionary (18%).
The top 10 holdings for the VGE are China-based companies. They account for 26.2% of total underlying assets, with Alibaba Group Holdings Ltd, Taiwan Semiconductor Manufacturing Co, Ltd, and Tencent Holdings Ltd being the top three for the Vanguard ETF.
VGE ASX has performed in line with its benchmark FTSE Emerging Markets All Cap China A since its inception. It has shown reliable performance with a 67.55% return since its inception compared to the 76.41% for the benchmark of FTSE Emerging Markets All Cap China A Inclusion Index. Check out Vanguard Investments for the most up to date information on the Vanguard FTSE Emerging Markets Shares ETF.
Would I own VGE?
So, the discussion of whether I would own VGE really comes down to two things. Firstly, asset allocation (and risk) and secondly cost (management fee).
Currently I get my international (ex US) exposure from the Vanguard VEU ETF which I bought to diversify out of my Australian home bias with the A200 fund, and to hedge my bets against just US stocks which I use the VTS ETF for.
In terms of asset allocation, VGE is really a fund that would provide me more exposure to the ‘emerging sector’ – namely Chinese, Taiwanese and Indian companies. More generally speaking, other current emerging market economies include India, Mexico, Russia, Pakistan, and Saudi Arabia – all of which seem to be included in the VGE umbrella in some percentage.
Looking at the top ten holdings of VGE and VEU, we can see there are actually a lot of similar names – Tencent, Alibaba and Taiwan Semiconductor Manufacturing Co.
VGE is more heavily weighted to China and Taiwan – approximately 44% and 16%, respectively, compared to the VEU weighting of 7.5% and 3%, respectively.
Ultimately, VGE is designed to be exactly this – a higher exposure to the emerging or immature markets, and the idea being you can ‘cash in’ on this emerging market as it matures and grows in capital value. Be wary about diverging too far from the index and reasonable global asset allocation strategies though – it may start to sound like those active stock pickers who frequently ’shift investment lanes’ and end up no further ahead in life.
Of course, reward is not without risk. Emerging markets like China can be thought of as very high risk. I would suggest anyone thinking of investing in VGE to watch The China Hustle on Netflix so as to understand the differing financial landscape and unique risks involved. With that context set, Investopedia also has a great article on emerging market funds.
Conventional wisdom would suggest not to have more than around 10% of your portfolio in emerging markets, and to be honest, I think that is probably good advice. Older references like InvestmentNews suggests 10 to 15%, whereas some newer commentators like SGS recommend a smaller percentage of around 5%.
So, where am I sitting? Well, with my current target portfolio looking something like a very simple 1/3 AUS, 1/3 USA, and 1/3 world (ex US) (it’s almost like a child chose those proportions, no?) I can actually dive a little deeper to see what my current exposure to emerging markets is.
Vanguard shows that the emerging markets actually makes up about one quarter of the VEU fund. Now there are conjectures around the internet about this figure, with some suggesting it is closer to 20%. So, put simply, since I am targeting a ⅓ split between VEU:VTS:A200, that means my target exposure to emerging markets should be simply ⅓ of 20-25% – or around 6.6- 8.3%
And let’s stop over thinking there. My intended VEU split provides me PLENTY of exposure to emerging markets, and there is no need for me to complicate things any further.
Oh and the last thing – VGE currently has a management expense ratio of 0.48%, yet I am paying a cool 0.08%. I am pretty happy to be ticking all of the boxes of reasonable asset allocation, ultra diversification, an efficient ETF structure with an incredibly low management expense ratio.
So bottom line – no, I will not be investing in the Vanguard VGE fund.
VGE review: Conclusion
Vanguard FTSE Emerging Markets Shares ETF (ASX:VGE) looks to track the return of FTSE Emerging Markets All Cap China A Inclusion Index (with net dividends reinvested) for a “low-cost” MER of 0.48%. VGE holdings are mostly in technology, financials, and consumer discretionary, with most of the market allocation based in China (34%) and Taiwan (20%), and other emerging markets included are India (15%), Brazil (6%), South Afria (4%) and Saudia Arabia (4%). Major companies held include Taiwan semiconductor, Tencent and Alibaba.
Emerging markets are one of the more higher risk investments when compared to established markets or ‘blue chip’ ETFs, and conventional wisdom would be not to invest more than 5-15% into emerging markets due to this risk. Things you can’t control include poor or developing regulations, which can mean there is a higher chance of corruption, and fraud, as well as emerging markets having poor economies – which could lead to lowerall overall performance.
After analysing VGE through this review, I personally am not investing in VGE, as I achieve more than enough emerging markets and international diversification through my holdings in VEU. Vanguard offers the following information to help you make a decision for yourself though;
Buy and hold investors seeking long-term capital growth, international diversification, and with a higher tolerance for the risks associated with share market volatility.Vanguard
As always, if you get stuck, its probably worth chatting to a licenced advisor about whether VGE is something you should consider.
My tools for investing in ETFs
- Pearler for buying ETFs
- Sharesight for tracking my ETF performance
- WeMoney to track my expenses and budget each month
- See more of my recommended resources here
Financial Disclaimer: CaptainFI is NOT a financial advisor and does not hold an AFSL. This is not financial Advice!
I am not a financial adviser and I do not hold an Australian Financial Services Licence (AFSL). In this article, I am giving you factual, balanced information without judgment or bias, to the best of my ability. I am not giving you any general or personal financial advice about what you should do with your investments. Just because I do something with my money (or use a particular service or platform) doesn’t mean it is automatically appropriate for your personal circumstances. I do not recommend nor endorse any financial or investment product, and my usage or opinion of any product should not be interpreted as an endorsement, advertisement, or intent to influence.
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