ASX:VGS. A deep dive into a top international shares ETF

The Australian share market makes up just 1.9% of the global market, so investing solely in Australia means missing out on the vast majority of investment opportunities beyond our fair shores. VGS, the Vanguard MSCI Index International Shares ETF, is a great way for investors to diversify their portfolio with international investments.

A key reason we use the VGS ETF in InvestSMART's ETF portfolios is that it's incredibly diversified. It tracks the MSCI World ex-Australia Index, giving investors exposure to some of the world's biggest and most successful companies, such as Apple, Microsoft, and Amazon. One of the benefits of owning a widely diversified portfolio, is that when one part of the global economy is booming, the you will have exposure to it. This has been the case with AI stocks which have been a strong driver in the outperformance of international ETFs in 2023.

Here are some of the key benefits of investing in VGS: 

• Diversification: VGS gives you exposure to over 1,468 stocks from developed countries outside of Australia. This helps to reduce your risk by spreading your money across a variety of different companies and industries. 

• Low fees: VGS has a management fee of just 0.18% per year. This is one of the lowest fees on the market, so you keep more of your investment returns. 

• Liquidity: VGS is a very liquid ETF, due to its size at $6.1 bn, which means that you can easily buy and sell it. 

• Track record: VGS has a long track record of performance. Over the past 5 years, it has returned an average of 11.55%. 

Distributions are provided quarterly, and a distribution reinvestment plan is available. 

VGS is in several of InvestSMART’s PMA portfolios, with weightings as per the table below, as of 30 June 2023. 

Which countries do the VGS ETF companies come from? 

The stocks in the VGS ETF come from around 23 countries including North America, Europe and Asia (particularly Japan). 

The following table shows the breakdown of equity exposure in VGS, for the top 10 countries, as of 30 June 2023. 

Within the above countries, the US has strong representation, given the enormity of their stock market. Keep in mind too that the US now has five companies that are valued north of $1 trillion, which include Apple, Microsoft, Alphabet, Amazon, and now NVIDIA. 

What are the top 10 stocks in VGS? 

The following table shows the top 10 holdings in VGS as of 30 June 2023. 

VGS has a significant weighting in technology, which is reflected in the sector weightings. The largest sector is Information Technology with 22.6%, followed by Financials with 14.3%, Healthcare with 12.8%, Consumer Discretionary with 11.2%, and Industrials with 11.2%. 

VGS performance 

The following table shows the total returns of VGS (after management fees and costs), separated into price and income components for the period ending 30 June 2023. Please note that the inception date for VGS is 18 Nov 2014. 

As can be seen from the table, VGS has had excellent returns since inception, though keep in mind that all of these figures have been bolstered by the huge rise in technology stocks over the last six months. 

Pros and Cons 

There’s a lot to like about VGS, especially given its size, diversification, relatively low fee, and excellent performance since inception. The fund is also managed by Vanguard, one of the best investment managers in the business. 

The advantage of such a wide diversification of stocks in the ETF, is that it reduces exposure to stock and sector specific risks. 

VGS is unhedged, which means that there is some currency movement risk, which could of course be positive or negative (depending on the direction of the currency). One advantage of it being unhedged, is that it enables the ETF management fee to be slightly lower than what it would be if it was hedged. The unhedged VGS has a management fee of 0.18% whilst the hedged equivalent of VGS (i.e. VGAD) has a management fee of 0.21%. VGS will closely follow its benchmark, the MSCI World Ex Australia NR AUD, and is an excellent international ETF for long-term investors. 

These advantages are the reasons why VGS has been included in several of InvestSMART’s investment portfolios.