The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of my preferred choices to gain exposure to the global share market.
The ASX is great, but it only accounts for 2% of the global share market. I think it's important that we gain exposure to the global economy.
With the VGS ETF, we can invest in more than 1,300 businesses from various countries, including the United States, Japan, the United Kingdom and Canada, through a single investment.
After the US Federal Reserve took the surprising step of cutting the interest rate by 50 basis points, I think it's worth considering the Vanguard MSCI Index International Shares ETF.
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Lower interest rates may help valuations
The Federal Reserve appears pleased with how inflation is going and wants to ensure that US employment does not deteriorate too much, though it does expect a worsening.
Market commentators have been talking for a while about whether the US economy will have a soft/gentle landing or a hard landing. The size of the rate cut may help the prospect of a soft landing.
With how strongly the global share market (including the VGS ETF) has performed since the beginning of 2023, I'd suggest many investors were already expecting rate cuts. The US Federal Reserve is expected to make a few more rate cuts by the end of 2025, which could help valuations over time.
As Warren Buffett, the legendary investor from Omaha, once said about the importance of interest rates:
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.
Focus on the long-term quality of the businesses
Ultimately, I don't think interest rates are the biggest factor in returns. I don't really mind whether central bank rates are 5%, 4%, or 3%.
The best companies can grow their earnings over the long term, regardless of the surrounding economic noise. I think many of the businesses within the VGS ETF are among the best at what they do in the world.
Some of the most well-known holdings include Apple, Microsoft, Nvidia, Amazon.com, Meta Platforms, Alphabet, Tesla, Visa, Procter & Gamble, Mastercard, Walmart, Netflix and Adobe.
The VGS ETF has a return on equity (ROE) of around 20%, suggesting there's plenty of merit in those businesses investing within themselves for more growth if they can make that sort of double-digit return on shareholders' money.
In five years, I think this group of companies will make stronger profits, justifying a higher valuation.
I wouldn't say this week specifically is the only time to buy VGS ETF units, I think it's nearly always a good time to invest in a diversified global ETF like the Vanguard MSCI Index International Shares ETF.
