I think that Vanguard Msci Index International Shares ETF (ASX: VGS) is one of the most effective exchange-traded fund (ETF) options.
There are a few different things that I want to see when I’m picking a potentially great ETF and I think this one ticks them all.
Strong holdings
The performance of an ETF investment is decided by how well its holdings do. The ETF simply copies the capital growth and passes on the dividends to investors.
When an ETF has strong holdings, it gives me confidence that it can perform well over the long-term.
In the VGS portfolio are some of the biggest and strongest businesses in the world at what they do.
Look at some of the biggest positions: Apple, Microsoft, Alphabet, Amazon, Tesla, Meta Platforms (Facebook) and Nvidia – you’d have to spend hundreds of billions of dollars to try to challenge any of those companies. They are great options.
Diversified
Having the whole portfolio invested in just a few names or in just one industry could leave it vulnerable to difficulties.
The ETF has just under 1,500 positions, making it one of the most diversified ETFs on the ASX. Not only that, but there are five sectors where more than 10% of the portfolio is invested: industrials (10.3%), consumer discretionary (12.3%), healthcare (12.7%), financials (12.8%) and IT (24.1%). In my opinion, IT is the sector that investors should want the most exposure to over the long-term.
In my opinion, Vanguard Msci Index International Shares ETF offers excellent diversification. It might be the type of investment that could be an investor’s only share investment, or at least only one of a few.
Global earnings
When looking at the market allocation of the VGS ETF, you’d see that the US makes up more than 70% of the holdings’ listing location. Another 6.4% is invested in Japanese businesses, 4.1% in the UK, 3.3% in Canada, 3.2% in France, 3% in Switzerland and 2.5% in Germany.
It seems like the vast majority is allocated to the US, and most of the rest to just a few countries. However, it’s important to remember that companies like Microsoft and Alphabet (Google) earn their profit from people all over the world. Microsoft office products, YouTube, Apple smartphones and so on are utterly global. There isn’t as much reliance on one area as it seems.
Low costs
Low costs aren’t essential to be a solid ETF investment, but minimising expenses helps improve the long-term performance of the portfolio.
The Vanguard Msci Index International Shares ETF has an annual management fee of 0.18%. I think that’s great value for how much international diversification investors get.
Summary thoughts on the VGS ETF
I think this investment ticks all the boxes you could want it to, with promising holdings and low costs.
Returns have been good too, with an average net return of 15.2% per annum over the last five years, though I wouldn’t expect the next five years to be as good.
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