With the volatility that the global share market has seen in 2022, I think it's a good time to go looking for ASX opportunities. However, the Australian dollar has been falling. Does this mean it's a good time to be looking at the Vanguard MSCI Index International Shares ETF (ASX: VGS)?
For readers who don't know, this exchange-traded fund (ETF) looks to give investors exposure to the global share market, mostly to western markets such as the US, the UK, Canada, France, and Switzerland. It also has investments in Japan, Hong Kong, and Singapore.
What's going on with the Vanguard MSCI Index International Shares ETF?
Since the beginning of the year, the fund's unit price has dropped around 15%.
The performance of an ETF is dictated by its underlying holdings.
In this ETF, there are approximately 1,470 holdings offering plenty of diversification across countries and sectors.
I won't write out a huge list of the holdings, but I'll mention the fund's largest holdings at 30 September 2022. They were Apple, Microsoft, Amazon.com, Tesla, Alphabet, UnitedHealth, Johnson & Johnson, Exxon Mobil, and Berkshire Hathaway.
Many share prices have dropped in value over 2022 as investors factor in higher interest rates when thinking about valuations. Why do interest rates have an effect on asset prices? Legendary investor Warren Buffett once said:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
What about the Australian dollar?
The Vanguard MSCI Index International Shares ETF has a weighting of around 70% to the US share market. That means the performance of the ETF's US shares has a significant impact on the overall portfolio.
But the reduction of the Australian dollar against the US dollar has had the effect of cushioning the decline of the unit price.
I think this can be illustrated by comparing the S&P 500 Index (INDEXSP: .INX) to the iShares S&P 500 ETF (ASX: IVV), which is an ETF that aims to track the same index for Aussies.
In 2022, the S&P 500 Index dropped by 25%. This compares to the ASX-listed iShares S&P 500 ETF return of a drop of just 12.4%. This happened because, at the start of the year, the Australian dollar was worth US 72 cents but has now dropped to US 62 cents.
So, in Australian dollar terms, Aussies have seen less of a drop in their portfolio value.
Is it a good time to buy?
While a weaker Australian dollar has cushioned Aussie from bad returns, it now means that we're not able to buy as many international shares, particularly US shares, as before.
If, or when, the Australian dollar strengthens against the US dollar, this would also be a headwind for returns for Aussies in Australian dollar terms. So, in that sense, the significantly-weaker Australian dollar has made it a bit more expensive to go shopping for overseas shares.
However, at the same time, it's worth noting that US shares have dropped. Even with the weaker Aussie dollar, the Vanguard MSCI Index International Shares ETF has still dropped by 15%. As such, I think it's materially better value than it was at the start of the year.
