How diversified is the Vanguard International Shares ETF?

How diversified is the VGS ETF really?

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Key points

  • The Vanguard MSCI International Shares Index ETF is a popular ASX ETF 
  • Many investors no doubt flock to this ETF for the diversification it provides 
  • But are investors really getting the diversification they are paying for? 

Although the statistics consistently show that exchange-traded funds (ETFs) covering Australian ASX shares are the most commonly held amongst ASX investors, the Vanguard MSCI Index International Shares Index ETF (ASX: VGS) is still a popular choice. In fact, VGS is the second-most popular ASX ETF that covers international shares on the market. This means that this ETF is a go-to choice for many investors who want to diversify an ASX share portfolio to include some exposure to countries and companies that lie outside Australia.

But how far does the Vanguard International Shares ETF go in this regard? Is this ETF really a good choice for ASX diversification? Let’s take a look under the hood of this ETF.

VGS ETF: Diversified or not diversified?

So VGS is an ETF that is extremely wide in its scope. It aims to track a basket of international shares listed across the advanced economies of the world. That means that VGS houses shares from countries ranging from the United States, Canada, and the United Kingdom to Singapore, Japan and most of Europe. At the latest count, this ETF houses close to 1,500 individual underlying shares within it.

In saying that, it is the United States that unambiguously dominates this ETF. On the latest data, 70.5% of VGS’s underlying portfolio consists of US shares. Indeed, so do its top ten investments. All ten of these are US companies, which in turn are dominated by tech giants like Apple Inc (NASDAQ: AAPL), Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN) and Tesla Inc (NASDAQ: TSLA).

So we have something of a dualling narrative here. Yes, VGS has exposure to more than 20 different countries’ markets. Yet more than 70% of its portfolio weighting is to the US. Yes, VGS has almost 1,500 underlying shares in its portfolio. But its top ten positions make up just over 20% of its entire portfolio.

So the Vanguard International Shares Index ETF can arguably be thought of as both diversified and concentrated. VGS charges a management fee of 0.18% per annum.

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. Motley Fool contributor Sebastian Bowen has positions in Alphabet (A shares), Amazon, Apple, and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Tesla, and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), 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 Scott Phillips.

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