The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a popular exchange-traded fund (ETF) on the ASX. In fact, it is ASX investors' second-most popular ETF that covers international shares, only behind the iShares S&P 500 ETF (ASX: IVV).
But the Vanguard International Shares ETF is also one of the most diversified funds available, with close to 1,500 individual shares within its underlying investment portfolio. So how can investors know whether this extremely wide fund is a good investment, containing high-quality companies?
Well, let's have a look at how it is actually structured.
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How is the Vanguard International Shares ETF built?
So although the Vanguard International Shares ETF holds close to 1,500 different companies, it is actually a very top-heavy ETF. As it turns out, its top five holdings alone account for approximately 15% of the ETF's entire portfolio by weighting.
Let's examine the largest companies in the Vanguard International Shares ETF and see what kind of quality we are getting here
The fund's top holding is Apple Inc (NASDAQ: AAPL), a company that needs little introduction. For one, it's hardly debatable that Apple has one of the strongest brands in the world. But the company can also boast a very stable financial position.
Apple started paying a consistent dividend back in 2012 and has increased its dividend every single year since. Even so, it is still only paying out 14.7% of its earnings as dividends today. That indicates immense financial strength to me.
The next holding in the Vanguard International Shares ETF is Microsoft Corporation (NASDAQ: MSFT), another company that most investors would know well. Chances are most of us use a Microsoft product or service every day, which is a good start.
But Microsoft also has a formidable financial position. This company has a much-envied 17-year streak of growing its annual dividends. It has a higher, but still impressive, dividend payout ratio of 27.4% of earnings today.
More quality companies?
The Vanguard International Shares ETF's next three top holdings are Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon.com Inc (NASDAQ: AMZN), and Tesla Inc (NASDAQ: TSLA).
Here's where things get interesting. Unlike Microsoft and Apple, these companies do not pay dividends at present.
So both Alphabet (parent company of Google) and Amazon shares have had a rough time of late, thanks largely to disappointing earning reports.
However, in Alphabet's case, the company still reported US$69.1 billion in revenue and US$13.9 billion in net income. For the quarter. It also announced that it still has US$116 billion in cash, cash equivalents, and marketable securities on its balance sheet. With almost absolute dominance in the global search market, it's hard to argue that Alphabet isn't still a top-tier company.
Turning to Amazon, this company reported US$127.1 billion in net sales for the quarter, which was up 15% year on year. Amazon is also a household name with a formidable scale and brand. The fact it can still grow its revenue by double digits when it is at 12 figures is enough to call it a quality company in my view.
Tesla might be the most divisive name in the Vanguard International Shares ETF's portfolio. But there's no denying the fact that it is the world leader in electric vehicle manufacturing and battery technology.
Its rise to become one of the largest companies in the world in only a few years is also almost unprecedented. Yet this is a company that still reckons it will increase its production rate by 50% this year.
So, all in all, I think the top five companies in the Vanguard International Shares ETF are of the highest quality. You don't climb to the top of the global companies pile with mediocrity after all.
