I have many ASX shares in my investing portfolio. But there are only a few that I consistently add fresh capital to. Like many investors, different shares serve different roles in my own investing strategy. And the ASX share we’re talking about today has a central role.
Well, it’s not exactly an ASX share, rather, it’s an exchange-traded fund (ETF). The Vanguard MSCI Small Companies Index ETF (ASX: VSO) is an index ETF from provider Vanguard. But it is a rather unique ETF on the ASX. Instead of tracking the S&P/ASX 200 Index (ASX: XJO) or the S&P/ASX 300 Index (ASX: XKO), VSO is an ETF that follows the MSCI Australian Shares Small Cap Index.
This means that, unlike most other ASX index funds, it is not dominated by the big ASX banks like Commonwealth Bank of Australia (ASX: CBA), or the miners like BHP Group Ltd (ASX: BHP).
One of the problems that I have with index funds that mirror the ASX 200 or the ASX 300 is the dominance that the banks and miners have over these indexes. Take an ASX 200 ETF like the iShares Core S&P/ASX 200 ETF (ASX: IOZ).
Four of the IOZ ETF’s top six holdings are the big four ASX banks, making up 18.5% of the fund’s weighted portfolio. BHP and Woodside Energy Group Ltd (ASX: WDS) add another 13% or so.
This ASX share plays a central role in my portfolio
Now that’s fine. But it doesn’t exactly scream diversification. That’s why I supplement my portfolio with the Vanguard Small Companies ETF. This fund holds around 170 ASX shares, but all hail from the smaller end of the ASX. So no big banks or mega-cap miners here.
Instead, the largest holdings in the VSO ETF are mid-cap shares like Atlas Arteria Group (ASX: ALX), Carsales.com Ltd (ASX: CAR) and Lynas Rare Earths Ltd (ASX: LYC).
Materials are still the most dominant sector in this ETF. But other sectors such as industrials, consumer discretionary shares, and real estate make up far more of this ETF’s holdings than your typical ASX 200 or ASX 300 index fund.
So I think of this fund as a great way of adding a big dose of diversity to complement my own ASX 300 index fund.
But Even though this VSO ETF looks a little different to a typical ASX index fund, it provides similar results. The Vanguard Small Companeis ETF has returned a healthy 14.32% average per annum over the past three years to 30 April. Over the past five years, this rises to an average of 7.2%, and 7.59% for the past ten years.
And those returns include some healthy dividend distributions as well. Over the past 12 months, this ETF has a trailing dividend distribution yield of 5.79%, which comes partially franked as well.
Thus, it’s for all of these reasons that I keep buying units of the Vanguard Small Companies Index ETF. It forms a valuable component of my overall investment portfolio and gives me access to a corner of the market that I would otherwise leave unturned.
