If you are considering jumping on the bandwagon and investing in the Vanguard MSCI Index International Shares ETF (ASX: VGS), you are not alone. In 2024, this popular ETF has been attracting serious attention, especially from Australian investors. In fact, during the September quarter, it drew in $861 million in net cash inflows, making it one of the most favoured Vanguard ETFs on the market. But what exactly are you buying into when you invest in this international ETF? Let’s break it down.

Why VGS ETF Is Popular with Investors

The Vanguard MSCI Index International Shares ETF is a favourite among investors seeking international exposure. The appeal lies in three primary reasons: diversification, global exposure to top companies, and its focus on mega-cap stocks.

Geographical Diversification

The ETF offers broad geographical diversification. It tracks the MSCI World ex-Australia Index, meaning it excludes Australian companies but includes businesses from developed markets around the globe. A significant portion of its holdings, about 73%, are US-based companies. However, it also includes stocks from Japan, the UK, Canada, and various other regions. This spread reduces the risk associated with investing in just one country, making it a safer choice for those looking for international exposure.

Exposure to Over 1,300 Companies

When you buy shares of the VGS ETF, you’re gaining exposure to over 1,300 companies listed in developed nations. These are some of the largest and most established businesses worldwide. This helps spread risk across multiple sectors and regions, giving investors more stability.

Focus on Large-Cap Stocks

If safety is your top priority, the VGS ETF’s focus on large-cap stocks will provide peace of mind. About 80% of the companies in this ETF are massive, globally recognised brands with strong earnings and stable growth prospects. These large businesses have more resources and are generally more resilient in the face of market volatility.

The Stocks You Are Investing In

One of the key features of the VGS ETF is its allocation towards technology giants, financials, healthcare, and other major sectors. Let us dive into the specific stocks you would be owning if you decide to invest.

At the top of the list, you’ll find some of the most well-known names in the world:

• Apple Inc. (4.88% weighting): As the largest holding, Apple is a tech titan. From iPhones to wearables, its dominance in consumer electronics and services is unmatched.
• Microsoft Corp. (4.37% weighting): Microsoft continues to play a central role in global technology with its cloud services, software, and hardware offerings.
• Nvidia Corp. (4.29% weighting): Nvidia is a leader in graphics processing units (GPUs) and artificial intelligence, which are shaping the future of gaming, tech, and more.
• Amazon.com Inc. (2.51% weighting): The world’s largest online retailer is also a key player in cloud computing, logistics, and AI.
• Meta Platforms Inc. (1.8% weighting): Meta (formerly Facebook) remains a major force in social media and the metaverse revolution.
• Alphabet Inc. (GOOGL and GOOG, combined 2.61% weighting): Google’s parent company Alphabet is a global leader in digital advertising, search, and innovative technologies.

Other top holdings include Broadcom, Tesla, and Eli Lilly, each contributing around 1% of the ETF’s total value. These companies represent a diverse range of industries, from semiconductors to electric vehicles and pharmaceuticals.

Sector Breakdown: Where Is Your Money Going?

If you’re wondering which industries you’ll be investing in through the VGS ETF, here’s the breakdown:

• Technology (25%): Unsurprisingly, tech is the largest sector, thanks to the dominance of US tech giants like Apple, Microsoft, and Nvidia.
• Financials (15%): Major global banks and financial institutions play a significant role in the ETF’s portfolio, providing stability.
• Healthcare (12%): Healthcare stocks, such as pharmaceutical companies like Eli Lilly, offer potential for steady growth, especially in an ageing world.
• Industrials (11%) and Consumer Discretionary (10%): These sectors cover a wide range of businesses, from manufacturing to consumer goods, providing further diversification.

This blend of sectors ensures that your investment is not overly reliant on any one industry, adding another layer of protection to your portfolio.

Performance and Fees

Since its inception in November 2014, the VGS ETF has delivered solid returns, with an average annual return of around 13% before fees. In the 2024 financial year, it benefited from the impressive performance of US shares, particularly the S&P 500 and the Nasdaq, which rose by 22.7% and 28.61%, respectively. By contrast, the S&P/ASX 200 Index in Australia grew by only 7.83%, making international markets a more attractive option for many investors.

Another advantage of the VGS ETF is its low management fee of just 0.18% per annum, making it a cost-effective way to invest in a broad range of international companies. This fee structure, combined with the ETF’s performance, is a key reason why Australian investors have been flocking to it.

What’s the catch?

Despite all the benefits, it’s important to note that the VGS ETF is not hedged. This means it is exposed to fluctuations in foreign currency values. When the Australian dollar rises, the value of your international investments might decrease, and vice versa. This currency risk is something to consider if you’re thinking about investing in this ETF.

Additionally, because the VGS ETF holds over 1,300 stocks, each individual company carries a relatively small weight in the overall portfolio. For example, Apple, the largest holding, accounts for only 4.88% of the total investment. While this helps diversify risk, it also means that no single company has a large impact on the ETF’s performance.

Ready to Own a Piece of the World?

If you are looking to diversify your portfolio and gain exposure to some of the largest and most influential companies in the world, the Vanguard MSCI Index International Shares ETF (ASX: VGS) is a compelling option. With a strong focus on tech, financials, and healthcare, combined with geographical diversification and a low management fee, it’s no wonder this ETF continues to attract investors. Whether you’re following the herd or leading your own path, the VGS ETF offers a solid way to invest in global markets with confidence.