Under the Spotlight AUS: Vanguard Australian Shares Index ETF (VAS)

Starting the new year with an ambition to invest more? The Vanguard Australian Shares Index ETF ($VAS) offers a low-cost, one-click way to gain exposure to Australia’s top 300 stocks. It’s the largest exchange-traded fund on the ASX, with over $18b in funds under management.

Tracking the S&P/ASX 300 Index since its inception in 2009, $VAS is popular with Stake investors and recurring investments. It charges an investment management fee of 0.07% and makes quarterly distributions. 

The approaching earnings season and possible interest rate cuts offer an opportunity to assess the biggest stocks and sectors within this ETF. As expected, its most significant allocations mirror those sectors at the commanding heights of the Australian economy: banks, miners and retailers. 

Bank on it

The Vanguard Australian Shares Index ETF has a hefty weighting in banks. Around one quarter of the ETF’s holdings are in Commonwealth Bank ($CBA), National Australia Bank ($NAB), Westpac ($WBC) and ANZ Group ($ANZ). 

Bank stocks have been on a tear. The S&P/ASX 200 Banks Index is up 32% over the past year, compared to a 12% gain in the benchmark S&P/ASX 200 Index. Banks’ safe haven status – built on strong balance sheets, solid earnings and rising dividends – has attracted increased institutional buying. The superannuation industry’s ownership of banks increased from 27.9% in September 2023 to 29.7% last September. A rise in the superannuation guarantee to 11.5% in July 2024 and increased flows into ETFs have supported capital flows into bank stocks.  

The impressive outperformance has sparked debate over valuations and whether the rally can continue in 2025. Morgan Stanley calculates the current average forward price-earnings multiple for the major banks at 18.6x (or 15.1x excluding CommBank). This is above the 10-year average of 13.7x and post-pandemic average of 14.4x. While the premium valuations reflect strong balance sheets, analysts will closely watch credit quality amid strained household budgets and the risk of higher staff and technology costs. 

Another key factor to monitor is margins when the Reserve Bank of Australia starts cutting rates. As income takes a hit from lower rates charged on loans, can the big banks boost margins and attract capital by lowering rates on deposits? The banks are expected to generate single-digit EPS growth over coming years.   

Three of the big four banks have installed or announced new CEOs over the past year. This heightens the threat of execution risk after a period of management stability. Andrew Irvine took over NAB’s top role in April, while Anthony Miller assumed Westpac’s hot seat last month. Miller’s challenges include completing the technology integration program known as Project Unite. ANZ hired outsider Nuno Matos – CEO of wealth and personal banking at UK-based HSBC ($HSBC) – to succeed Shayne Elliott next July. Matos’ top task is the integration of Suncorp Bank, with the $4.9b acquisition completed in July 2024.

Banks have also been supported by increased dividends and buybacks – all four have ongoing buybacks. Westpac has completed $2b of its $3.5b buyback and NAB has bought $2.5b shares from its $3b buyback. ANZ has around half of its $2b buyback remaining while CommBank will buy another $720m to complete its $1b buyback. Additional buybacks are expected. Banks have consistently lifted dividends and this is expected to continue over the next two years.  

In the pits

Australia’s world-leading miners also have a significant weighting in the ETF, at just over 10%. BHP ($BHP), the world’s largest listed mining company, accounts for around 7% of the portfolio. Rio Tinto ($RIO) and Fortescue ($FMG) are among the top 20 holdings.

The past 12 months have been a tough slog for the sector, with the S&P/ASX 300 Metals and Mining Index declining 8%. There’s one overarching drag on performance: China. Activity in the world’s second largest economy has slowed amid a property market slump. This lowered demand for steel and dragged down prices for iron ore – now at around US$100 a tonne, down from US$140 a year ago. We warned in July that the golden age of iron ore was over. Mining costs should support iron ore around US$100 a tonne, though new supply is coming – Rio Tinto’s Simandou project in Guinea stands out – and could weigh on prices. However, that’s counterbalanced by lower grades at existing mines.

BHP and Rio Tinto have exposure to copper, which has been touted as a big winner from the long-term trend towards electrification. Both companies have a stake in Chile’s Escondida, the world’s largest copper mine. Still, the price of copper has fallen from over US$10,000 a tonne last year to US$9,000 a tonne due to weak demand from China. 

Trump and China loom large over short-term prices. Trump’s tough talk on trade has spurred pre-emptive copper buying in the U.S. and Comex copper prices are higher than those on the London Metals Exchange. Copper bulls will be looking to Beijing for additional stimulus, like previous subsidies for new home appliances and EV trade-ins, but this is unlikely before the National People’s Congress in March. 

Retail therapy

Retail giants Wesfarmers ($WES), Woolworths Group ($WOW) and Coles Group ($COL) have roughly a 6% weighting in $VAS. Think about where you spend your money. It’s more than likely a chunk has gone through the register at one of the big supermarkets, plus Kmart, Target, Big W, Bunnings or Officeworks. 

The latest retail sales data shows Australian consumers remain resilient despite sticky inflation and high interest rates. Wesfarmers shares are up 25% over the past year, thanks mainly to its home improvement and hardware giant, Bunnings. Coles shares are up 23% over the past year, while Woolies is down 16%.

The supermarket chains will be in sharp focus in 2025. They were public enemy number one in 2024 and should get little respite in this election year – both sides of politics will be looking for someone to blame for the cost of living. There are two massive regulatory dark clouds on the horizon: the ACCC’s final report on supermarket pricing and the watchdog’s legal proceedings over alleged misleading discounts. That said, both Woolworths and Coles have consistently lifted dividends. We riffed on the challenges for new Woolworths CEO Amanda Bardwell in December. 

One and done

The Vanguard Australian Shares Index ETF offers easy and low-cost exposure to Australia’s largest listed companies. You won’t enjoy the massive gains from the market’s star stocks, but you can save yourself the researching time and collect a quarterly distribution. 

However, it pays to stay informed about what you actually own: a basket of stocks and sectors that will encounter swings and roundabouts across the market cycle.  

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.