Why is the Vanguard MSCI Index International Shares ETF (ASX:VGS) underperforming the ASX 200 lately?

Why has Vangaurd’s international offering fallen behind the ASX 200?

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Despite some volatility over the past month or so, the S&P/ASX 200 Index (ASX: XJO) has enjoyed a relatively solid month of returns. After today’s moves, the ASX 200 is now up by 1.73% since 20 September. Annualised, that represents a return of over 20%. Perhaps surprisingly, this return also trumps that of the Vanguard MSCI Index International Shares ETF (ASX: VGS).

Mostly due to the stunning performances of the US tech companies over the last decade or so, most Aussie investors have gotten used to the US markets outperforming the ASX 200 in recent years. But not for the past month. Against the ASX 200’s 1.73% return, VGS units have actually gone backwards, losing 1.66% since 20 September.

VGS is not solely a US-based exchange-traded fund (ETF). But the States do make up a good 69% of VGS’s total share allocation. The remaining weightings in this broad-based ETF come from Japan, the United Kingdom, Canada, France, and Switzerland, amongst a few others.

So how has the ASX 200 flipped the tables over the past month to beat VGS’s returns?

Well, let’s look at the performances of each index/ETF’s top holdings.

ASX 200 vs. VGS: Who comes out on top?

So according to the iShares S&P/ASX 200 ETF (ASX: IOZ), the ASX 200’s current top holdings are Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL) and BHP Group Ltd (ASX: BHP) with weightings of 8.33%, 6.46% and 5.46% respectively.

In contrast, VGS’s current largest holdings are Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN) with weightings of 4.16%, 3.55% and 2.62% respectively.

With the ASX 200, CBA shares are now up 3.06% over the past month. CSL is down by 3.62%, while BHP has lost 1.84%.

Apple is up 2.53% over the same period, with Microsoft gaining 4.41% and Amazon putting on 2.71%.

Confused? I wouldn’t blame you. On paper at least, it seems that the VGS ETF should be beating the ASX 200. Well, there could be a few possible mitigating factors at play as well.

Firstly, the Aussie dollar has risen by around 2% over the past month. This means that ETFs that hold assets denominated in US dollars become less valuable in Aussie dollar terms. And since VGS is listed in Australian dollars on the ASX, this would have dented its performance over the month.

VGS also paid out a dividend distribution recently. Unitholders received a distribution of 34.26 cents per share on 18 October (yesterday) with the ETF trading ex-distribution on 1 October. This would have further dented the on-paper returns of VGS, even though its investors benefitted from the payout.

But VGS unitholders shouldn’t be too put out. This ETF has still returned an average of 15.26% per annum over the past 5 years. IOZ’s ASX investors have only enjoyed a 10.28% per annum average over the same period.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Amazon, Apple, CSL Ltd., Microsoft, and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Amazon, Apple, and Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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