All-in-one ETFs: Using a single ETF to get global exposure

When trying to choose index funds for an Australian, you can decide to either use an all-in-one ETF or create a DIY portfolio. If you choose to do an all-in-one, which ETF should you choose?

Before I compare some ETFs, keep in mind of the following terminology:

• Management Expense Ratio (MER) – the annual cost of an ETF that gets taken from the performance of the ETF. Therefore, this cost is the same regardless of what broker you use to buy the ETF.
• Total cost before tax – This will be MER – securities lending income (%). It is not necessary to know what securities lending is (u/UnnamedGoatMan goes through what it is in this post), but all you need to know is that it makes Vanguard ETFs a little cheaper. Transaction and indirect costs are assumed to be negligible.
• Assets Under Management (AUM) – The AUM of a fund is the total amount of money invested by all its investors. To avoid the risk of a fund closing down due to insufficient assets, a general rule of thumb is for the fund to have at least a $100 million or $0.1 billion AUM. A higher AUM tends to mean higher liquidity and thus a lower buy/sell spread, which is how much the buy price and sell price differ from how much the fund is worth, a.k.a. the Net Asset Value or NAV.

I summarise the most popular all-in-one market-cap weighted ETFs below:

	VDHG*	DHHF
Management Expense Ratio (MER)	0.27%	0.19%
Estimated Total Cost at 32% tax rate^	1.21%	0.64%
Assets Under Management (AUM)	$3.57 billion	$1.25 billion
Growth/Defensive	90%/10%	100%/0%
Australian equity proportion	40%	37%
Underlying holdings	Managed funds & ETFs	ETFs
Hedging	Yes	No
Inception date	20/11/2017	15/12/2020

Growth to defensive allocation

According to Vanguard, from 1926 to 2019, 100% equities had a ~0.30% higher return than 90% equities and 10% bonds. Of course, having 10% bonds does help reduce the risk of the portfolio. Vanguard Australia provides the following reason for including bonds in VDHG:

The allocation to bonds plays a critical role in the asset allocation mix by providing downside protection during periods of equity market volatility. They fulfill the role of the defensive split within a portfolio, providing diversification and a buffer against equity risk during downturns.

Vanguard did release VDAL, a 100% equities ETF.

Australian equity proportion

I already wrote an article to help in choosing how much Australian exposure is reasonable: What Australian/International allocations should you choose. Although the 3% difference between VDHG and DHHF means that it won’t matter too much in the grand scheme of things.

Underlying holdings

Managed funds are more tax inefficient than ETFs, which I covered in this article: ETFs vs managed funds. Although Vanguard has announced that they will be slowly transitioning the underlying holdings of VDHG from managed funds to ETFs, currently the majority of VDHG’s holdings are managed funds.

The ETFs or managed funds the one-in-all ETFs hold are listed below:

Hedging

By holding assets outside of Australia, you will be subjected to exchange-rate fluctuations, and so the strengthening or weakening of the home currency against foreign currency can have an impact on the performance. It makes sense to hedge international bonds, as exchange-rate fluctuations are more volatile in bonds. For international equities, Vanguard (2015) suggests the following reasons for hedging:

1. Have access to low-cost products for achieving hedged exposure.
2. Do not believe that foreign currency will diversify their portfolio.
3. Have greater exposure to foreign assets (in other words, a smaller allocation to domestic assets).
4. Have an explicit portfolio objective of minimising realised global equity volatility.