The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of my favourite exchange-traded fund (ETF) ideas for retirees for a few different reasons.
Retirees, particularly those with self-managed super funds (SMSFs), have many different investment options. But, it seems that retirees are not really taking advantage of some of the great ETFs available.
Limited exposure to international share ETFs
According to the 2024 report from Class, an SMSF software accounting business, only a third of SMSFs have at least one ASX ETF in their portfolio, and the overall ETF allocation makes up less than 6% of the total asset allocation.
The Class report showed that 28.3% of SMSF assets were allocated to direct ASX shares, and direct property accounted for 21%. Multiple other categories had a bigger allocation than ETFs, including cash and term deposits, managed funds, unlisted trusts, and even 'other'.
Drilling into the ETF investments, perhaps unsurprisingly, the Vanguard Australian Shares Index ETF (ASX: VAS) is the most popular ETF. Only 10% of the SMSFs that were invested in ETFs held some VGS ETF units.
Considering all of the above, I think retiree investors would benefit from having some exposure to this great fund.
Global benefits of the VGS ETF
The ASX only accounts for around 2% of the global share market. Investing in the VGS ETF can provide access to much of the global share market that ASX-focused investors are missing out on through just one investment.
The Vanguard MSCI Index International Shares ETF is invested in more than 1,300 businesses worldwide. It gives exposure to not only the huge US tech giants but also leaders from places like Europe and Asia.
Australia is a great country, but I think it's a good idea to invest in businesses that are looking to grow in multiple/numerous countries globally because it gives them a longer earnings growth runway and more potential to deliver capital growth.
Owning this ETF means we don't need to try to decide which country/region-specific ETFs to invest in or which individual international companies to invest in. The VGS ETF can provide that diversification without the guesswork.
Given the number of great businesses from numerous countries in this portfolio, I think the annual management fee of 0.18% per annum is very reasonable.
Since its inception in November 2014, the VGS ETF has returned an average of 13.1% per annum, but remember, past performance is not a reliable indicator of future performance.
I'll note that this fund has a low dividend yield of 1.7%. So, how would it work to make passive income?
If the fund can continue producing net returns of at least 10% per annum, retirees could decide to sell a sustainable and reasonable portion, say 3% or 4% each year of their holding. The fund may still be able to grow retirees' net worth because, hopefully, the capital growth would be more than the sale proceeds over the longer term.
