November 9, 2021
Warm welcome to the new readers who have joined us this month.
I love seeing the FI community continue to grow as we bring more people along for the ride, creating wealth and freedom together.
Join us by subscribing here:
Every year, the finance world launches new products and investment options, most of which can be confidently crumpled up and thrown in the bin.
But every now and then, something genuinely helpful and worthwhile is created. One of those things is ‘one fund portfolios’, also known as ‘all in one’ funds.
In the last few years, a couple of notable and increasingly popular low cost all-in-one funds for Aussie investors have popped up: VDHG and DHHF.
In this post, I’ll take a look at both of these, discuss the pros and cons of investing in a one fund portfolio, and share my personal thoughts on whether I’d invest in them.
One fund portfolios are essentially designed to be an all-in-one solution. That is, everything an investor might need in a single fund.
These funds give investors ownership in thousands of companies from Australia and around the world, without the need to construct a portfolio themselves. The fund is managed for a small fee, and the income distributions from the underlying companies and ETFs inside the fund are passed onto the investor.
Aussies haven’t really had access to these all-in-one ETFs until relatively recently, so broadly speaking, they’re kind of a new invention for us.
Let’s take a look at two of the most popular options.
VDHG is an all-in-one style fund which Vanguard created in 2017. You can find the product page here.
VDHG itself holds a portfolio of index funds. Together, that forms a globally diversified portfolio, which includes Aussie, international, emerging markets and small cap shares.
What does VDHG’s portfolio look like?
The VDHG portfolio is 90% allocated to ‘growth’ assets (shares), and 10% allocated to so-called ‘income’ assets, being fixed interest and bonds. VDHG is roughly 40% invested in Australian assets, the rest international.
You can also see it uses a ‘Hedged’ version of international shares and bonds. Taking this into account means around 60% of the portfolio is invested in assets in Australian currency.
Vanguard will manage the fund to keep the various parts of the portfolio within their target range.
Management fees: The fee for VDHG is 0.27% per annum, which is automatically deducted from the fund in tiny increments on a regular basis, just like other ETFs.
Overall, VDHG would have to be close to the most popular investment option for long term investors in the FIRE community. It was basically the only simple, long term, low cost, all-in-one fund… until recently, when Aussie fund manager BetaShares came up with the following option!
DHHF is an all-in-one style fund which BetaShares created in 2020, made up of four index funds, all of which are ETFs. You can find the product page here.
One for Australia, the US, Developed countries outside the US, and emerging markets. The specific ETFs it holds are A200 for Australian shares, VTI for the US market, SPDW for developed markets outside US and SPEM for emerging markets.
DHHF is invested across all countries and all company sizes too. In jargony terms, it’s an ‘all-world’, ‘all-cap’ portfolio.
What does DHHF’s portfolio look like?
The DHHF portfolio is 100% invested in stocks. No cash or bonds like VDHG.
I think it’s great BetaShares is providing this option for those who don’t want any bonds/cash in their portfolio. Here’s the target allocation for DHHF:
Like VDHG, close to 40% of the portfolio is Aussie shares, the rest being international. But unlike VDHG, DHHF doesn’t use any hedging in its portfolio. More on this later.
Management fees: The fees for DHHF are lower than VDHG at 0.19%. But because some of the ETFs it invests in are listed in the US, there is a small tax drag from this (long story, explained here) which, funnily enough, ends up bringing the total cost to around 0.27%.
Tax: Given DHHF’s portfolio is made up of ETFs, whereas VDHG’s portfolio is made up of managed funds, this leads to another difference. They operate slightly differently, with managed funds being forced to sell shares when people redeem their money and leave the fund.
This creates capital gains events for all holders, not just those who are selling out. ETFs are able to avoid this, meaning capital gains events are created at the individual level, rather than at the fund level for all involved.
Basically, DHHF should be a bit more tax efficient over time, with its distributions being largely dividends only, no large capital gain payouts.
Extremely simple. Just throw your savings into one investment every month. No need to balance a portfolio, or even look at anything else. More holdings means more admin and more things to track. The simplicity in one of these funds is pretty remarkable – they’re quite a handy innovation.
Extremely diversified. As far as owning shares in lots of different businesses, it doesn’t really get more diversified than these two options. Thousands of companies from Australia and all over the world, from all sorts of industries – healthcare, technology, financials, consumer products, mining… everything.
Protection from yourself. Some people spend countless hours agonising over how much to invest in Aussie shares vs international, and so on. The more time you spend worrying about this stuff, the more holdings you’re looking at and thinking about, the more likely you are to tinker with it or make sub-par decisions.
Extremely efficient / High return on time invested. If you can earn a very similar return for less time invested, then that makes a lot of sense! And that’s certainly the case here, with DHHF and VDHG both likely to provide very solid long term performance as markets continue growing and paying dividends for the rest of our lifetimes. You can be confident you’re investing in a very sensible, highly diversified share portfolio without wasting any time.
Fees. Investing in DHHF or VDHG is more expensive than investing in low cost funds yourself. For example, if you bought VAS for Aussie shares and VGS for global shares, your fees would average 0.14% per annum vs 0.27%. That’s $1,300 per year on a $1m portfolio. Not an obscene amount, but not nothing either.
Lack of flexibility. With an all-in-one fund, you can’t choose which holding to top up (or sell down). If Aussie shares are underperforming, you’d ideally want to buy more and top up the cheaper fund in your portfolio. Having separate funds gives you this optionality, and should result in slightly higher returns.
Set allocation. If you don’t like the allocation that Vanguard or BetaShares has chosen, then VDHG and DHHF may not suit you. Maybe you want more of your portfolio in Australian shares, or more in global shares. Or maybe for some reason you want the ability to adjust your allocation over time. You could always have other investments sit alongside a one fund option, but they are what they are.
Manager control. It’s worth mentioning that BetaShares and Vanguard have control over how the fund is invested on an ongoing basis. As managers, they may decide to tweak the portfolio allocation over time, and I understand both have made minor changes in the past. Probably not something to be worried about, but you should at least be aware of it.
Boring. To be fair, this could also be put in the ‘pro’ column since boring investing tends to be the most profitable kind. But nevertheless, if you’re someone who wants a type of stimulation out of the investing process, you probably won’t get it from DHHF or VDHG! As mentioned, you can always invest in other things too, with DHHF or VDHG being the core of your portfolio, which is a very sensible approach.
If you’ve read this blog for a while you know I’m a fan of avoiding complication. The simpler things are – your life, your finances, whatever – you get those relaxed vibes and the whole situation is more enjoyable.
So, in that spirit, who should use these all-in-one funds? Probably most people… myself included 😉
But understandably, we’re human, so we like to tweak things for our own tastes, often desire more control over our investments, and like to save on fees where we can.
Yes, you’ll pay slightly higher fees and possibly get slightly lower returns than doing it yourself. But the simplicity and peace of mind with a fund like DHHF or VDHG (plus the fact that everything is done automatically) could also make you behave better as an investor and actually lead to higher returns.
While there’s always a reason to quibble why one thing is better than another (and no shortage of people on the internet doing so!), it doesn’t really matter. These funds might not be perfect, but they’re perfectly good.
While the names and breakdowns are different, they’re extremely similar beasts, with roughly the same amount of Aussie and international shares.
One main point of difference is VDHG has 10% of cash-like investments (bonds and fixed interest), while DHHF is 100% stocks. Personally, I prefer to decide how much cash I’m keeping based on life circumstances. For the funds I want to invest, I want it fully invested.
As mentioned earlier, DHHF is also likely to be more tax efficient over time since it is made up of ETFs, as opposed to managed funds with VDHG. No large chunks of capital gains will be paid out.
Another difference is currency. Because VDHG uses some hedging, around 60% of its assets are based in Australian dollars, versus 35-40% for DHHF.
Having much more than half my investments in overseas currencies would make me a little bit nervous, if most of my wealth was in DHHF. But given most people have cash and other investments like super and maybe even property, it’s not really a huge concern.
So there are a few differences between DHHF and VDHG, but broadly speaking, we’re kind of splitting hairs at this stage. Overall, I do like DHHF a bit better since it’s 100% shares and has a simpler portfolio.
Regular readers will sense that I’m a bit of a minimalist at heart. For this reason, sometimes I secretly fantasize about having all my money in a single investment fund. But for now, I’m quite happy with my portfolio which still feels simple enough.
Standing back for a minute, it’s amazing how investing in shares continues to become easier, even in just the last few years.
DHHF and VDHG are both great ways to benefit from owning thousands of successful companies, locally and globally, as they become ever-more profitable and pay dividends throughout our lifetime.
Both are relatively low cost, very diversified, easy to understand and easy to manage long term investments. It doesn’t get more hands-off than this!
If you want to make your investing simple, effective and super passive, these one fund portfolios might be the ideal option for you.
Are you investing in DHHF or VDHG? Would you consider it in the future? Let me know in the comments below.