The Vanguard MSCI Index International Shares ETF (ASX: VGS) is a leading exchange-traded fund (ETF) that may be best known for capital growth. But it also pays passive income.
It's an easy investment tool to gain exposure to the global share market.
It's certainly true that businesses like Coles Group Ltd (ASX: COL) and Telstra Group Ltd (ASX: TLS) offer a larger dividend yield than the global share market. But I think it's good to shift our perspective on what investments can provide cash flow for our finances. The VGS ETF can be a contender for delivering that income in multiple ways.
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VGS ETF dividend yield
The dividend yield of the underlying holdings essentially determines the dividend yield of an ETF.
The largest holdings in the portfolio are the biggest US businesses such as Nvidia, Microsoft, Apple, Amazon, Alphabet, Meta Platforms, Broadcom, Tesla, JPMorgan Chase, and Berkshire Hathaway. None of these companies has a sizeable dividend yield, and they're the ones with the biggest influence on the VGS ETF's overall yield. Each holding's weighting in the portfolio relates to how much it affects the fund's passive income.
The above is why the VGS ETF had a dividend yield of 1.7% at the end of June 2025. That's certainly not going to win over any income investors.
If investors just buy and hold it, then I wouldn't suggest it's a compelling idea for passive income.
But, the total returns of the Vanguard MSCI Index International Shares ETF could help it be an option for cash flow.
Access the capital growth of the Vanguard MSCI Index International Shares ETF
Businesses are always trying to grow profit and they're regularly investing in their operations to drive further success. This helps send their share prices higher over time.
The VGS ETF has benefited from that long-term capital growth – it has delivered an average return per year of 13.4% between its inception in November 2014 and June 2025.
If someone had invested in November 2014 (and re-invested the income distributions), they could have decided to sell 5% or 6% of the fund's value each year, essentially creating a 5% or 6% cash flow yield and still achieved pleasing capital growth with the money left in the ETF.
Past performance is not a guarantee of future performance, so I'd rather choose a 5% yield than sell most or all of the gains each year. Some years will show volatility and market declines, so it's good to 'save' some of the gains for those negative years.
So, while the Vanguard MSCI Index International Shares ETF doesn't have a large dividend yield, I believe it has an excellent chance of providing passive income through unlocking a portion of the capital gains via sales of units.
