The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of the biggest exchange-traded funds (ETFs) on the ASX, with a fund size of more than $10 billion at the end of 2024.
The ASX ETF provides exposure to many of the world's largest companies listed in 'developed' countries.
It invests in a broad range of businesses, so Aussie investors can benefit from the long-term growth potential of companies from international economies outside of Australia.
According to Vanguard, 2024 was a very good year for the VGS ETF, with a total return of 31.2%. Here's why I think there is potential for more good returns over the long term.
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Strong diversification
A top reason to like the Vanguard MSCI Index International Shares ETF, in my view, is the strength of its diversification.
This year could continue to throw up uncertainty and volatility depending on inflation, interest rates, trade tariffs and so on. Of course, 2025 could be another good year for the share market but one of the best protections against possible market declines is diversification.
The VGS ETF's portfolio is spread across numerous countries, giving it excellent diversification, in my view.
The portfolio has at least 0.5% invested in several countries, including the United States with the largest weighting at 75.2%. Others include Japan (5.5%), the United Kingdom (3.5%), Canada (3.1%), France (2.6%), Switzerland (2.2%), Germany (2.2%), the Netherlands (1.1%), Sweden (0.8%), Denmark (0.7%), Italy (0.7%), Spain (0.6%) and Hong Kong (0.5%).
The fund is also diversified in terms of sector allocation. Five different industries have a weighting of more than 10%. They are information technology (26.6%), financials (15.6%), consumer discretionary (11.2%), industrials (10.7%), and healthcare (10.4%).
To me, that seems better than the S&P/ASX 200 Index (ASX: XJO), which is heavily focused on just two sectors: ASX bank and mining shares.
Great holdings
There are many wonderful businesses inside this portfolio that have built a reputation as industry winners. This collective group of global companies is capable of growing profits for years to come because of their ability to expand into many countries, offer new products or services, and improve profit margins.
Some of the biggest names in the portfolio include Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta Platforms, Tesla, Broadcom, JPMorgan Chase and Eli Lilly.
Some investors, including myself, likely underestimate how much profit growth these companies can achieve over the long term, meaning their share prices could potentially rise further than many predict.
I believe the VGS ETF can deliver pleasing returns over the next five years, and I'd be happy to invest this year.
Appealing financial metrics
The financial characteristics of the VGS ETF are very positive, in my view.
It had a return on equity (ROE) of 19.4% in December 2024, which shows how much profit the businesses are making on the shareholder money retained within the company. This high ROE highlights the quality of the underlying businesses and also suggests to me the companies can generate further strong profits on additional retained profit generated in the future.
Vanguard also showed in its December 2024 monthly update that the VGS ETF's growth rate was 18.3%. Earnings growth is a key driver of shareholder returns, so that's a positive sign.
There's no guarantee of positive returns in the shorter term, but I think this ASX ETF looks like a solid investment for long-term ownership.
