I would much prefer to invest in Vanguard Msci Index International Shares Etf (ASX: VGS) than big four ASX banks like Westpac Banking Corp (ASX: WBC).
The largest banks of Westpac, National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) are some of the biggest companies in Australia they may offer decent income but there are three key reasons why I prefer the VGS ETF:
Growth potential
I think that the investments that are more likely to deliver good total returns are the ones worth owning.
NAB, ANZ, CBA and Westpac are all huge. They have very strong positions in the Australian and New Zealand Banking world. They can’t really grow their market share much more. And overall lending is only growing at a low single digit rate each year, which kind of caps how much growth the banks can achieve.
However, the VGS ETF has a portfolio of shares that have a lot more growth potential, both with their core product and new ones they be coming out with.
Over the next five to ten years, I think the global blue chips (and particularly the slightly smaller names) have very good earnings growth potential. I am thinking about names like Apple, Microsoft, Alphabet (Google), Visa, Mastercard, Tesla, PayPal and so on.
Quality
I believe that the portfolio of VGS ETF names is higher quality than the big four banks.
I’m not just talking about the profit growth potential. I am saying that most VGS ETF businesses are more innovative, are more adaptable and have global growth aspirations. I’d also say that many VGS ETF holdings have more attractive financial metrics, like return on equity (ROE).
It seems to be an unfortunate trend that at least one major ASX bank seems to go through a scandal, large penalty or remediation program each year. It seems like an unnecessary drain of profit as well as bad attention. Those scandals don’t give them a good reputation.
Diversification
The big four ASX banks generate most of their profit from lending in Australia and New Zealand. There isn’t much service/product diversification or geographic diversification.
I think VGS is better for diversification in every way. It gives exposure to around 1,500 businesses rather than one bank, or up to four banks.
VGS ETF is invested across many different sectors like technology, healthcare, retail, communication and so on.
The underlying earnings are much more diverse. Just think about Microsoft, it has the Office suite (like Word and Excel), the Windows operating system, Xbox, LinkedIn, cloud computing and so on. Alphabet has Google Search, Android phones, YouTube and so on. These are diverse, global businesses.
What about the income?
It’s true that VGS ETF has a lower dividend yield, of 1.6%, compared to the banks. However, investors are able to boost their cashflow by selling a small portion of VGS ETF units if needed, which hopefully would only make up a portion of the long-term capital growth.
Over the last five years, the VGS ETF has delivered an average total return of 15.7% per year. However, past performance is no guarantee of future performance.
