What’s impacting the Vanguard MSCI Index International Shares ETF price in 2022?

The VGS ETF has been dropping in 2022. What’s happening?

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Key points

  • The Vanguard MSCI Index International Shares ETF price has had a tough start to the year
  • The US Federal Reserve is expected to start ramping up interest rates
  • VGS ETF owns a portfolio of global shares that are being impacted

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Meta Platforms, Inc., Microsoft, Nvidia, Tesla, and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson and has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Meta Platforms, Inc., Nvidia, 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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