The Vanguard MSCI Index International Shares ETF (ASX: VGS) price has fallen in 2022. What has happened to the global share market for this to occur?
For readers that don’t know, the VGS exchange-traded fund (ETF) seeks to give investors exposure to many of the world’s largest companies listed in major developed countries. It’s a globally-focused investment.
Since the beginning of 2022, the VGS ETF price has fallen by more than 11%.
Overnight, the NASDAQ-100 (NASDAQ: NDX) fell by 2%.
What’s going on with the global share market?
Interest rates are expected to increase, potentially in a big way, in 2022. Interest rates could keep rising beyond 2022.
Overnight, the US Federal Reserve boss Jerome Powell indicated the US interest rate could increase by 50 basis points next month alone. That would be an increase of 0.50%.
At an International Monetary Fund panel, Powell said, according to CNBC:
It is appropriate in my view to be moving a little more quickly. I also think there is something to be said for front-end loading any accommodation one thinks is appropriate… I would say 50 basis points will be on the table for the May meeting.
Traders also reportedly have priced in another 50 basis point hike in 2022, according to CNBC.
Powell also said:
It may be that the actual [inflation] peak was in March, but we don’t know that, so we’re not going to count on it.
We’re really going to be raising rates and getting expeditiously to levels that are more neutral and then that are actually tight … if that turns out to be appropriate once we get there.
The US Federal Reserve could also soon start reducing the number of bonds that it is holding, according to reporting.
Why would this affect the VGS ETF?
ETFs are investment vehicles that simply track the returns of their underlying holdings.
The Vanguard MSCI Index International Shares ETF owns around 1,500 positions. Some of the biggest holdings include Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN), Tesla Inc (NASDAQ: TSLA), Nvidia Corporation (NASDAQ: NVDA), Meta Platforms Inc (NASDAQ: FB), Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), UnitedHealth (NYSE: UNH), and Johnson & Johnson (NYSE: JNJ). Plenty of its holdings have seen declines in 2022.
Why would changing interest rates affect asset prices? Warren Buffett once described interest rates as gravity on asset prices – the higher the interest rate, the stronger the ‘gravity’ can pull down on the asset price.
Ray Dalio, the founder of Bridgewater Associates, once said about interest rates: “It all comes down to interest rates. As an investor, all you’re doing is putting up a lump sum payment for a future cash flow.”
It’s still up over the long-term
While the VGS ETF is seeing declines in 2022, it has gone up more than 50% over the last five years.
Time will tell what happens next with the Vanguard MSCI Index International Shares ETF (and the global share market) amid all of this volatility.
It has an annual management fee of 0.18% per annum.
It continues to be a popular ETF, with $4.6 billion in net assets.