The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of the most popular exchange-traded funds (ETFs) and index funds in Australia. In fact, it is the second-largest ETF on our market, only coming in behind the flagship Vanguard Australian Shares Index ETF (ASX: VAS).
It seems ASX investors cannot get enough of this internationally-focused fund, and are putting more money into it (now a total of more than $14 billion) than other strong contenders, such as the iShares S&P 500 ETF (ASX: IVV) and the BetaShares Nasdaq 100 ETF (ASX: NDQ).
But, unlike the other funds listed above, this ETF is a relatively complex one. It doesn't track a single market like VAS, IVV, and NDQ do. Instead, it represents a complex investment in more than a thousand stocks, hailing from multiple continents.
So today, let's dive into this popular ASX ETF and check out exactly what you're buying when you purchase VGS units.
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The ASX's VGS: What's in an ETF?
At first glance, it does indeed look as though the VGS ETF is a highly diversified one. It draws its underlying stock portfolio from over 20 different countries. These range from Ireland, Israel, and Hong Kong to Sweden, Japan, and Canada.
This underlying portfolio consisted of 1,282 holdings as of 31 October.
So you might be forgiven for thinking that this is a highly diversified fund.
But VGS is far less diversified than those numbers suggest.
The index that VGS is built upon, the MSCI World ex-Australia Index, is weighted by market capitalisation. This means that the largest companies in the index take up the most weight and influence.
This, in effect, means that VGS' portfolio is dominated by US stocks. How dominated exactly? Well, the US contributed 73.9% of the entire VGS portfolio if we take this weighting into account. The second-largest contributor is Japan at just 5.6%. Followed by the United Kingdom at 3.3%.
VGS' top ten shares are all US stocks, too. Combined, these ten shares make up just under 28.4% of this entire 1000+ stock portfolio. 6.03% goes to Nvidia shares alone. The other members of the VGS top ten are the usual suspects. Mainly, the other 'Magnificent 7' stocks like Apple, Microsoft, Alphabet, and Amazon.
Foolish Takeaway
There's nothing inherently wrong with this approach, of course. This heavy exposure to the US is one of the primary reasons why VGS units have returned more than 20% per annum over the past three years.
But if you are buying this ASX index fund with the expectation of gaining even diversification across a large swathe of the global economy, you might want to consider other options. The Vanguard International Shares ETF could arguably be better described as an 'American ETF with a pinch of Japan and Europe'.
