A two-ETF portfolio is the simplest form of diversified investing: one ETF covering Australian shares, one covering international shares. Together, two ETFs can provide exposure to thousands of companies across dozens of countries — all at minimal cost and with near-zero management required.
Why Two ETFs?
More is not always better in portfolio construction. Two broadly diversified ETFs provide:
- Exposure to ~1,800+ companies globally (VAS + VGS)
- Coverage of all major sectors across Australia and world markets
- Total portfolio cost of 0.10–0.20%/year
- Simple annual rebalancing
- Clarity — you always know exactly what you own
Adding more ETFs beyond two (for most investors) adds complexity without meaningfully reducing risk or improving returns.
The Two Main Two-ETF Combinations
Option 1: VAS + VGS (most popular)
| ETF | Index | Holdings | MER |
|---|---|---|---|
| VAS | S&P/ASX 300 | ~300 Australian companies | 0.07% |
| VGS | MSCI World ex-Australia | ~1,500 global companies | 0.18% |
Blended MER at 40/60 (VAS/VGS): ~0.14%/year
Option 2: A200 + IWLD (lowest cost)
| ETF | Index | Holdings | MER |
|---|---|---|---|
| A200 | S&P/ASX 200 | 200 largest ASX companies | 0.04% |
| IWLD | MSCI World | ~1,600 global companies | 0.09% |
Blended MER at 40/60: ~0.07%/year — exceptionally low.
IWLD includes a small Australian company weighting (unlike VGS which excludes Australia) — a minor overlap consideration for the purist, but not materially significant.
Allocation Options
The split between Australian and international shares is the key decision:
| Split (Aus/Intl) | Franking benefit | Global diversification | Currency exposure |
|---|---|---|---|
| 70% / 30% | Very high | Low | Mostly AUD |
| 50% / 50% | High | Moderate | Balanced |
| 40% / 60% | Moderate | Good | ~40% AUD / 60% hedged or USD |
| 30% / 70% | Lower | High | Mostly international currency |
| 20% / 80% | Low | Very high | Predominantly international |
The 40/60 split is commonly cited as a reasonable balance: enough Australian shares for meaningful franking credit income; enough international for genuine global diversification beyond Australia’s 2% of world markets.
What Each ETF Provides
VAS / A200 (Australian shares)
- Exposure to Australia’s largest companies (banks, miners, healthcare, retailers)
- Franked dividends: Tax credits that offset personal income tax or are refunded in super pension phase
- AUD-denominated: No currency risk for Australian investors
- Lower growth orientation (banks and resources dominate vs tech-heavy global indices)
- High yield: ~4–5% gross dividend yield
VGS / IWLD (International shares)
- Exposure to US (~65%), European, Japanese, and other developed market companies
- Technology, healthcare, consumer discretionary — sectors underrepresented on the ASX
- Higher growth companies (Apple, Microsoft, Nvidia, LVMH)
- Currency exposure: Returns in AUD are affected by AUD/USD fluctuations
- Lower dividend yield (~2%) but higher capital growth historically
Running a Two-ETF Portfolio
Buy:
- Open a brokerage account (SelfWealth $9.50/trade, Pearler, CommSec)
- Buy your chosen ETFs in the target allocation
- Set up DRP (dividend reinvestment) if desired
Maintain:
- When new money is available to invest, buy whichever ETF is below its target weight
- Annual check: if allocation has drifted by 5%+, rebalance
- No constant monitoring required
Example portfolio ($50,000):
- $20,000 in VAS (40%)
- $30,000 in VGS (60%)
- Annual brokerage cost (if investing monthly): 12 × $9.50 = $114/year
- Annual MER cost: ~$70/year (blended 0.14%)
- Total annual cost: ~$184 or 0.37% — very competitive
Two-ETF vs Three-ETF vs All-in-One
| Approach | Complexity | Cost | Flexibility |
|---|---|---|---|
| Two ETF (VAS + VGS) | Very low | Low (~0.14%) | High |
| Three ETF (+bonds) | Low | Low (~0.13%) | High |
| All-in-one (VDHG) | Minimal | Slightly higher (0.27%) | Low |
| Individual shares | High | Variable | Very high |
For investors who want to include bonds, adding VAF as a third fund completes the portfolio. For pure growth (no bonds), two funds are all that’s needed.
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Frequently Asked Questions
Is VAS or VGS better for Australians? VAS and VGS serve different purposes and are complementary — VAS provides Australian share exposure with franked dividends (tax-efficient for Australians), while VGS provides international diversification and access to sectors underrepresented on the ASX. Most investors benefit from holding both. General information only.
What allocation should I use between VAS and VGS? There is no single correct answer. A 40% VAS / 60% VGS split is commonly suggested as a starting point, balancing franking credit income against global diversification. More VAS tilts toward income and home-country exposure; more VGS tilts toward growth and global diversification.
Can I add more ETFs later? Yes — many investors start with two ETFs and add a third (bonds, REITs, infrastructure) as their portfolio grows and their strategy becomes clearer. There’s no obligation to stay at exactly two funds forever.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.