The Vanguard MSCI Index International Shares ETF (ASX: VGS) can be one of the most effective exchange-traded funds (ETFs) for building wealth, in my view.
There is a wide array of ETFs that can be used to build wealth, but there are only a few that tick as many boxes as this one does.
The goal of the ETF is to provide exposure to many of the world's largest companies listed in major developed countries. Vanguard created this fund to offer low-cost access to a broadly diversified range of shares that allow investors to participate in the long-term growth potential of international economies outside of Australia.
The VGS ETF has strong diversification
I believe it's important for Aussies to remember that the ASX only accounts for 2% of the global stock market. There are lots of other businesses that are appealing to own. Plus, the global share market is not dominated by slow-growing bank stocks and mining stocks.
The VGS ETF had 1,284 holdings at the end of November 2025, which I think is an enormous amount of diversification. Even 100 holdings would be adequate diversification, in my opinion.
But the fund is diversified not just by the number of holdings, but also by the sector allocation.
At the end of November, these are the exposures:
- Information technology (27.7%)
- Financials (16.1%)
- Industrials (11%)
- Consumer discretionary (10.1%)
- Healthcare (9.9%)
- Communication services (9.1%)
- Consumer staples (5.6%)
- Energy (3.4%)
- Materials (2.9%)
- Utilities (2.7%)
- Real estate (1.8%)
I think it's useful that the Vanguard MSCI Index International Shares ETF is invested across an array of sectors.
The fund is also invested in a variety of markets.
While the US accounts for a sizeable majority of the portfolio, there are many other markets with a weighting of at least 0.4% including Japan, Canada, the UK, France, Germany, Switzerland, the Netherlands, Sweden, Spain, Italy, Hong Kong, Denmark and Singapore.
I truly believe that Australians would benefit from gaining exposure to companies listed in different countries.
Growing weighting to a few large US stocks
While there are over a thousand holdings, there are a few names that are becoming an increasingly large part of the VGS ETF. That comes with both positives and negatives.
The largest seven positions in the fund account for more than 25% of the portfolio, which I think investors should be aware of. We're talking about Nvidia, Microsoft, Apple, Meta Platforms, Alphabet, Amazon and Broadcom. This isn't necessarily a bad thing, considering how strong these businesses are and how they regularly produce pleasing shareholder returns.
The S&P/ASX 200 Index (ASX: XJO) is even more heavily weighted to its largest holdings, so it's not a unique situation. But, the fund doesn't appear to be quite as diversified as it used to be, with a few large businesses becoming larger pieces of the pie.
Excellent financial characteristics
One of the key reasons why the fund has managed to perform so strongly – an average return of 15.7% per year over five years – is the ongoing good earnings growth of the businesses.
According to Vanguard, the fund's portfolio of companies has seen an overall earnings growth rate of 22.1% over the previous year, which I'd say is an excellent rise considering how large the businesses already are.
Another positive is the return on equity (ROE) ratio of 19.6%, which says how much profit the businesses make on the retained shareholder money within the businesses. It's a sign of quality but also implies what sort of return the businesses could make on future retained profits.
The ROE is why I'm expecting the VGS ETF can continue to perform adequately over the long-term, even if the valuation seems higher than normal today. Re-investing cash for a good profit boost should unlock shareholder returns over time.
