Is Vanguard MSCI Index International Shares ETF (ASX: VGS) the best long-term investment?
There are a lot of different exchange-traded funds (ETFs) out there that can help diversify your portfolio. They can be used to just generally invest into shares. Or they can provide tactical diversification if you want more exposure to a particular geography or industry.
Each ETF is different and it's important to understand what you're investing into.
What is Vanguard MSCI Index International Shares ETF?
The aim of this ETF is to give investors exposure to the global share market, excluding Australia.
It's invested in many of the world's largest businesses in major developed countries for a low cost.
The investment is provided by Vanguard, one of the world's leading investment managers. I think Vanguard is great. It aims to lower the cost of investing for investors. The owners of Vanguard are the investors themselves, Vanguard shares the profit by lowering costs.
I think Vanguard MSCI Index International Shares ETF is one of the best ETFs to consider because of its global diversification.
The portfolio
It's actually invested in around 1,550 positions. That's an excellent amount of diversification from just one investment.
Those holdings aren't just based in one country, it's invested right across the world. Around two thirds of the portfolio is invested in US shares, though remember that many of those US companies are global names – they just happen to be listed in the US. Other countries that represent more than 1% of the portfolio include: Japan, the UK, France, Switzerland, Canada, Germany, the Netherlands, Sweden and Hong Kong.
I also like the diversification offered in terms of the sector allocations. IT has the biggest allocation with a 22.5% holding. I believe investors should want a large tech exposure because that's where the growth seems to be coming from.
Other sectors with a double digit allocation include 13.8% to healthcare, 12% to consumer discretionary, 11.5% to financials and 10.4% to industrials.
I'm sure you're wondering about the actual businesses Vanguard MSCI Index International Shares ETF owns. Its biggest 10 holdings are: Apple, Microsoft, Amazon, Facebook, Alphabet, Johnson & Johnson, Nestle, Proctor & Gamble, Visa and Nvidia.
There are plenty of other interesting businesses as smaller holdings including Adobe, Salesforce.com, Walt Disney, Netflix, PayPal, SAP, Costco, ASML, AstraZeneca, Accenture and LVMH.
The performance
The ETF has performed reasonably well since inception in November 2014 with net returns of an average of 11.5% per annum. That includes the painful decline due to COVID-19.
Whilst there are some ETFs that have performed comfortably better, I think Vanguard MSCI Index International Shares ETF's performance has been decent. A double digit return is a wealth-building growth rate.
The management fee
A big part of an ETF's returns is a management fee. The lower the fee the higher the net return will be. Its fees can be really low because it just tracks an index rather than any active management component.
Vanguard MSCI Index International Shares ETF has an annual management fee of just 0.18%, which is very attractive to me. It's cheaper than most Australian fund managers.
Why I prefer it over Vanguard Diversified High Growth Index ETF (ASX: VDHG)
Vanguard Diversified High Growth Index ETF is a popular option because it offers a lot of diversification. A fund of ETFs in a single investment option. Why wouldn't you just go with that instead?
Well, whilst I like the exposure to investments like smaller international shares and perhaps the emerging market shares, I don't need a 10% allocation to bonds at this stage in my life.
I like the 100% allocation to shares with Vanguard MSCI Index International Shares ETF, it offers great diversification and a decent dividend income of around 2%. I think it could be one of the best, though I'd prefer to go with Betashares Global Quality Leaders ETF (ASX: QLTY).
