The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of the most popular exchange-traded funds (ETFs) and index funds on the ASX. In fact, it is the most popular index fund on our market outside the Vanguard Australian Shares Index ETF (ASX: VAS), with over $12 billion in assets under management.
The Vanguard International Shares ETF is a great fund. I have recommended it to investors myself. It offers a lot of diversification for ASX investors who wish to own high-quality companies not listed in Australia. These are offered at a relatively cheap management fee of 0.18% per annum.
However, despite this index fund's perks, I have a major problem with it. It's not an insurmountable issue, but it's still open that I believe all VGS investors should be aware of.
It's the level of diversification that VGS units offer ASX investors.
See, on the tin, it is implied that the Vanguard International Shares ETF provides ASX investors exposure to a portfolio of, well, international shares.
In turn, this implies that the VGS ETF will offer exposure to a range of stocks from a range of different countries. This is technically true. On the surface, the VGS portfolio contains stocks from around 20 different countries. These range from Canada and Britain to Hong Kong, Israel, Norway, and Singapore.
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The ASX's not-so-international VGS ETF
However, if we look at VGS' weighted portfolio, it's a different story entirely. As an index fund, the Vanguard International Shares ETF tracks an index that is ordered according to market capitalisation. This means the largest companies get the highest presence (or weighting) in the fund's portfolio.
As it happens, almost all of the world's largest companies hail from the United States of America.
Looking at VGS' top ten largest holdings today, all ten are US stocks. These stocks, which include familiar names like NVIDIA, Apple, Amazon, and Alphabet, account for more than a fifth of VGS' entire weighted portfolio despite nearly 1,300 underlying holdings.
Indeed, a whopping 72.6% of VGS' portfolio consists of American stocks. The next largest contributor is Japan, with a mere 5.7%.
As such, although the ASX's VGS ETF appears to be a diversified international shares index fund, in reality, it is mostly a US-based index fund with a smattering of international diversification.
There's nothing wrong with this, of course. But if investors were truly hoping to add meaningful exposure to the other advanced economies of the world, they might wish to explore additional investments like the Vanguard All-World ex-US Shares Index ETF (ASX: VEU) or the iShares MSCI EAFE ETF (ASX: IVE).
