The Vanguard MSCI International Shares Index ETF (ASX: VGS) is one of the best exchange-traded funds (ETFs) on the ASX, in my view. The VGS ETF is an extremely broad and diversified fund that covers shares from dozen of countries.
It seems ASX investors have taken note, with VGS now one of the most popular ETFs on the ASX covering international shares. So let's dig into why this ETF could serve a useful role in any ASX share portfolio.
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What is the VGS ETF?
The Vanguard International Shares ETF is, at its heart, an index fund. The index it tracks is the MSCI World ex-Australia index. This index covers the share markets of 23 advanced economies around the world, excluding Australia.
Countries represented in VGS range from the United States, Canada, the United Kingdom, and France to Switzerland, Japan, Hong Kong, and Israel.
However, the whopping near-1,500 individual holdings in VGS's portfolio are weighted by market capitalisation. That means that it is the US holdings that make up the lion's share of this ETF's portfolio. In fact, more than 70% of the weighted portfolio is concentrated in American companies.
Naturally, the largest US shares are also VGS's largest holdings. You'll recognise many of its top names, such as Apple, Microsoft, Alphabet, Amazon.com, and Tesla. But other companies outside the US are also present within VGS's upper echelons, including names like Toyota, Nestle, Astra Zeneca, and Sony.
What's to like about this ASX index ETF?
So why would VGS make a useful addition to any ASX investor's share portfolio in my opinion? There are two reasons.
The first is diversification. As we touched on earlier, this ETF has almost 1,500 underlying shares within it, hailing from 23 different countries.
Although most of these are American by heritage, companies like Apple, Amazon, Exxon Mobil, McDonald's, and Starbucks are truly global giants, with the US representing a fairly small portion of their overall earnings base.
As such, I think VGS is an ETF that gives investors true global exposure, all in one ASX investment.
The second is performance. ASX shares are great. But sometimes they just don't give investors the kind of returns that are available from international shares.
As a case in point, let's look at the returns of the iShares Core S&P/ASX 200 ETF (ASX: IOZ), which is an ETF covering the Australian S&P/ASX 200 Index (ASX: XJO) benchmark.
As of 31 July, this ETF has averaged an annual return of 7.89% per annum. In contrast, VGS units have returned an average of 11.95% per annum over the same period.
Now, there's no guarantee that the Vanguard International Shares ETF will continue to outperform the iShares ASX 200 ETF into the future. But I think it's worth taking a chance that it will.
So those are the two reasons why I think the Vanguard MASCI International Shares Index ETF would be a worthy addition to any ASX investor's portfolio right now.
