Under the Spotlight AUS: Vanguard Diversified Growth Index ETF (VDGR)

Donald Trump’s crash or crash through approach to settling trade grievances has left investors nursing a few dents in their stock portfolios.

Markets were whipsawed in a volatile week fuelled by shirt-fronting between the U.S. and China. Washington unveiled more tariffs, only for Beijing to counter with a pledge to ‘fight to the end’. It’s no wonder even the big boys are tapping out: BlackRock, the world’s largest asset manager, cut its exposure to U.S. and Chinese stocks, instead rotating into short-term U.S. treasuries, which may benefit from a rush to safety. 

The Vanguard Diversified Growth Index ETF ($VDGR) offers Australian investors a way to partly hedge against the sweeping volatility. A 30% allocation to international and Australian fixed income provides a defensive buffer when bond prices rally (and yields fall) as stocks falter. Meanwhile, a 70% allocation to Australian and global stocks still provides exposure to any potential rebound in stocks.

The inclusion of bonds means $VDGR has lagged the performance of ETFs wholly invested in global stocks. However, it’s no slouch either: it averaged a total annual return of 9.41% a year – with lower volatility – over the five years to 31 March 2025. It pays a quarterly distribution and charges an annual management fee of 0.27%. The ETF is composed of other Vanguard managed funds and ETFs. 

Trump thump

The S&P 500 Index is down 10% this year, while the Nasdaq Composite has slumped 15%. But has the worst been priced in? The S&P 500 Index’s forward P/E multiple of 19.4x is below the five-year average of 19.9x, but above the ten-year average of 18.3x. This week’s trading activity showed some investors embraced ‘buy the dip’ in the hunt for bargains. 

$VDGR offers a way for more conservative investors to pick up beaten-up large cap U.S. stocks. Around a third of the portfolio is invested in global stocks through two Vanguard international share funds (one being currency hedged). The biggest holdings are Apple ($AAPL), Nvidia ($NVDA), Microsoft ($MSFT), Amazon ($AMZN) and Meta Platforms ($META). 

A key test for U.S. stocks will be the upcoming earnings season, with large U.S. banks reporting on Friday night. S&P 500 companies are expected to deliver 7% year-on-year (YoY) earnings growth in Q1, though that estimate is down from 11.7% at the start of the year. Management commentary on the impact of tariffs will be key for investor sentiment. 

Australian stocks have not escaped the chaos. The S&P/ASX 200 Index is down 6% this year, with market leader Commonwealth Bank ($CBA) down 7% from its February highs. A quarter of $VDGR is invested in Australian stocks through a Vanguard fund and ETF. The top five holdings there include Commonwealth, BHP ($BHP), CSL ($CSL), Westpac ($WBC) and National Australia Bank ($NAB). The key issues for investors will be the impact on China’s demand for commodities if U.S. tariffs hurt its growth, and the fallout on banks’ net interest margins given expectations the Reserve Bank of Australia will cut interest rates to support the economy.   

Yield shield

Bad news is good news for bonds. They shine brightest when jittery investors seek the safe haven of fixed income. Bond yields go down as bond prices go up. 

Out of that 30% of $VDGR invested in Australian and global fixed interest, two thirds come from a stake in the Vanguard Global Aggregate Bond Index Fund (Hedged). The top 10 holdings are mainly shorter and medium term U.S. bonds, but around 50% of holdings are from outside of North America. This provides a very well diversified portfolio of global fixed income securities.  An additional stake in the Vanguard Australian Fixed Interest Index Fund provides exposure to bonds issued mainly by the Commonwealth and state governments. 

Bonds have been the go-to play amid the volatility, but bond investors find themselves in cross currents. On one hand, the prospect of slower global growth and central bank rate cuts should support bond prices and push yields lower. On the other hand, the prospect of higher prices caused by tariffs may restrain central banks who have only just started to bring elevated inflation to heel. 

Growth kicker

The Vanguard Diversified Growth Index ETF offers a ‘meat and three veg’ mix of large cap stocks and bonds, but it does come with a little bit of spice on the side.

Around 5% of the fund is invested in global small cap stocks. Small caps traditionally underperform during times of market uncertainty: the Russell 2000 Index – a yardstick for U.S. small caps – is down 17% this year. However, they can perform strongly when markets regain their footing. The fund’s biggest small cap holdings are U.S. fashion house Tapestry ($TPR) and food distributor U.S. Foods ($USFD).

$VDGR also offers a small exposure to emerging market stocks. Don’t let the name fool you: the top stocks in the portfolio are some of the biggest names in Asian tech. Taiwan Semiconductor Manufacturing Company ($TSM) leads the list, followed by Tencent ($TCEHY) and Alibaba ($BABA). Just last week we riffed on Alibaba’s 55% rally in Q1. 

Buckle up

The U.S. vs China trade showdown will keep markets on edge until the world’s two largest economies come to the negotiating table – or someone blinks. 

For those on the fence about how things will go, the Vanguard Diversified Growth Index ETF has something for both sides: an offensive tilt to take advantage of any settlement and a rally in stocks, and enough defence through bonds to provide some comfort should the ride get even bumpier.  

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.