Warren Buffett said that “diversification is a protection against ignorance”. Therefore, the average person should seriously consider making index funds/ETFs a core foundation to their stock portfolio. That is unless you are going to read every quarterly report of individual companies and their competitors.
What is an index fund? To start with an ETF is an Exchange Traded Fund, essentially a fund made up of lots of different stocks. An index fund is an ETF that aims to replicate the performance of a stock market index (such as the S&P500) or economic sector (such as Technology). Index funds will typically contain thousands of different stocks, so when you invest in a fund you are essentially investing in all these stocks. Because you are spreading out all of you money over so many stocks you are also spreading risk i.e. you are diversified.
In this article we will explore three Vanguard index funds (ETFs) that you could use to make a strong foundation to your portfolio. All the information below can be found by looking at the Fund Factsheets for free on JustETF.
Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL)
This ETF consists of 1,507 different stocks spread across the world. It aims to provide a regular high source of dividend income to investors. It offers a 3.5% dividend yield with a good earnings growth rate of 5.9% annually. The ETF does have an ongoing charge of 0.29% which is average. In the last year it has had growth of 17.82% and over the last 5 years grown 8.92% annually.
This ETF is focused on the USA (40.5%) followed by Japan (8.4%) and the UK (6.8%). This is to be expected as all three markets have a lot of matured and stable dividend producing companies. The main sectors that you would get exposure to are Financials (25%), Technology (10.9%) and Consumer Staples (10.7%). This is great with both the financial and consumer staple sectors being great for dividend income. Financials don’t typically have high dividend yields but do have great compound annual growth rates.
The top three company holdings for this ETF are Taiwan Semiconductor (2.3%), JPMorgan Chase & Co. (2%) and Johnson & Johnson (1.9%). All together the top three companies equate to 6.2% of the ETF.
Vanguard FTSE Emerging Markets UCITS ETF (VFEM)
The Vanguard Emerging Markets ETF contains 1,816 different stocks focused primarily in emerging markets around the world. This is great if you want your portfolio to have exposure to newer upcoming economies that are growing to be a larger share of the world economy in the future. It has a dividend yield of 2% which is average, but a massive earnings growth rate of 13.4% annually. The ongoing charge is 0.22% which is good as ETFs go. Over the last year the fund has grown 31.91% and over the last 5 years 14.53% annually.
The top three countries that this ETF focuses on are China (44.5%), Taiwan (16%) and India (11%). In terms of exposure to the future large economies of the world this fund is excellent with large weightings towards China and India. The top three sectors this fund is exposed to are Technology (26.9%), Financials (19.6%) and Consumer Discretionary (17.2%). All three sectors have a lot of room for growth in all emerging markets.
With regards to the top three holdings in this ETF there is overlap with VHYL. The top holding is Taiwan Semiconductor (7.3%), followed by Tencent Holdings (6.8%) and Alibaba Group (5.8%). Together the top three companies equate to 19.9% of the ETF.
Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF (VAPX)
The developed Asia Pacific ETF does not include Japan, but this is not a problem as it is included in VHYL. Additionally, it does not include China or India as they are regarded as developing economies. This ETF gives you exposure to 395 stocks in the stable Asian-Pacific economies which you would struggle to buy individually in the UK. It has a low expense ratio of 0.15%. It has an average dividend yield of 2.4% and a good earnings growth rate of 5.1% annually. Over the last year the fund has grown 35.99% and over the last 5 years 13.9% annually.
The top three countries the ETF is exposed to are Australia (39.5%), Korea (33.1%) and Hong Kong (19.4%). All three are home to generally stable income producing companies. In terms of sectors the fund is exposed to, the top three are Financials (25.9%), Technology (19.5%) and Consumer Discretionary (10.6%). All known for producing good income.
The top three holdings of this ETF are Samsung Electronics (12.3%), AIA Group (4.7%) and BHP Group (3.4%). Together the top three holding make up 20.4% of the fund.
None of the content in this article should be considered financial advice, I am not a financial adviser and you should always do your own research prior to investing. These are my opinions only.