The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a popular exchange-traded fund (ETF) that could be a useful investment for many investors, whether they're already in retirement or just starting out.
The VGS ETF enables investors to gain exposure to the global share market. It invests in businesses from a wide range of major developed countries, including the United States, Japan, the United Kingdom, France, Canada, Switzerland, Germany, the Netherlands, and Denmark.
Could the fund be a better choice for younger or older investors? I think it could be equally appropriate for both groups' investment strategies for a few key reasons.
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Tracks the market for low fees
The global share market has been a powerful wealth-building machine that has delivered pleasing long-term returns, thanks to the strength and economic moats of the underlying holdings.
The VGS ETF portfolio holds many of the world's leading companies, including Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, Visa, Procter & Gamble, Mastercard, Costco, Walmart and Salesforce.
This is a very high-quality group of holdings. It would take an individual investor a great deal of effort and research to recreate a portfolio with that much diversification and quality.
Thanks to this ASX ETF, we can track the performance of the global share market at a low cost.
VGS comes with an annual management fee of just 0.18%, meaning nearly all of the (excellent) returns stay in the hands of investors. Low costs are appealing whether you're old or young.
Good returns
I wouldn't advocate investing in something just because it's diversified. I want to have a satisfactory level of confidence that the investment returns could compound my wealth at a solid pace in the coming years.
According to Vanguard, the VGS ETF has delivered an average return per annum of 12.7% since its inception in November 2014. If the return can continue at a double-digit pace, that'd be good news for anyone's portfolio, whether they're beginners or retirees.
We can't accurately predict future returns, but some of the financial characteristics look compelling enough for continued long-term success. As of April 2024, according to Vanguard, the VGS ETF's return on equity (ROE) ratio is 18.8%, and the earnings growth rate for the overall portfolio is 14%.
When companies generate good earnings and reinvest money in their businesses for a profit return of almost 20%, I believe this is likely to lead to good long-term outcomes for shareholders.
The younger investors may be looking for an investment to grow their wealth, while older investors may want returns to pay for their lifestyle.
Beginners, retirees, and everyone else could benefit from that potential return and hopefully experience capital growth. However, no level of return can be guaranteed.
What about passive income for retirees?
People in retirement may want more cash flow than this ASX ETF's dividend yield can provide. According to Vanguard, the VGS ETF dividend yield was just 1.8% at the end of April 2024.
However, if the fund keeps delivering capital growth, retirees could decide to sell a small portion each year and still generate capital growth with their portfolio.
For example, if you invested $100,000 in Vanguard MSCI Index International Shares ETF units and the fund rose 10% in value (potentially including re-investing dividends) in one year, it'd be worth $110,000 after 12 months. You could sell $4,000 of the holding – creating a 4% 'dividend yield' on the initial balance – and still have $106,000 remaining.
I wouldn't want to sell all of the capital gains generated because a share market decline could occur in some years, so it would be wise to consider allowing the balance to keep rising in the positive years.
