Review of Vanguard International Shares MSCI Index ASX:VGS Exchange Traded Fund (ETF) from an experienced and long term investor on the path to Financial Independence
Vanguard International Shares MSCI Index fund (ASX:VGS) ETF is an Exchange Traded Fund which tracks the MSCI World (ex-Australia) index to provide Australian investors with exposure to global stock markets. It is run by the worlds most trusted provider of ETFs (Vanguard), and the ETF alone holds over (AUD) $2.2 Billion of some of the worlds biggest names such as Apple, Amazon and Microsoft. VGS holds 1547 individual global stocks, and has a Management Expense Ratio (MER) of .18% or 18 basis points.
This article will provide an overview of the Vanguard International Shares ETF (ASX:VGS) and explore its structure, management, holdings, past performance and fee structure to explore whether I will personally add it to my ‘FI Portfolio’.
“Vanguard MSCI International Shares Index ETF seeks to track the return of the MSCI World ex-Australia Index (with net dividends reinvested) in Australian dollars before taking into account fees, expenses and tax.”Vanguard VGS investment objective
Vanguard International Shares MSCI Index fund (ASX:VGS) ETF forms part of Vanguards wider International shares pool with a total fund size approaching (AUD) $20 Billion (total fund size $19,493.0 Million). The Fund currently holds 1547 individual shares across 20 of the worlds largest developed economies, but due to market cap is dominated by nearly two thirds US shares.
“The ETF provides exposure to many of the world’s largest companies listed in major developed countries. It offers low-cost access to a broadly diversified range of securities that allows investors to participate in the long-term growth potential of international economies outside Australia. The ETF is exposed to the fluctuating values of foreign currencies, as there will not be any hedging of foreign currencies to the Australian dollar.”Vanguard VGS Fund Overview
Benefits of investing in Vanguards Exchange Traded Funds include;
Competitive long-term performance: Vanguard’s investment approach provides investors with an efficient way to capture long-term market performance.Vanguard Australia
Diversification: The Fund invests in a diversified portfolio of securities, which means the Fund is less exposed to the performance fluctuations of individual securities.
Low cost investing : The Fund has low ongoing fees as we strive to minimise the costs of managing and operating the Fund.
The top holdings of VGS are Apple, Microsoft, Amazon, Alphabet (Google) and Facebook. These 5 stocks make up just over 15% of the fund. This is still a huge portion of the portfolio to be in a only a handful of US tech stocks, but it is reassuring to know that the fund is broadly diversified with over 1500 companies spread across different markets and sectors.
VGS has over a two-third weighting into US stocks due to their huge global market capital. The next largest market allocations include Japan, the United Kingdom, France and Canada and these five economies make up over 86% of the entire fund.
VGS has the highest sector allocation to Information Technology, or Tech stocks. However, this is only about one fifth of the portfolio, with Health Care, Consumer discretionary spending, Financials and Industrial sectors being the next largest and collectively making up over two thirds of the entire fund (70.1%).
The entire VGS Fund portfolio consists of 1547 individual companies across 20 of the worlds largest developed economies. It would be ridiculous to list them all here, but if you want to see exactly whats in VGS head to Vanguard and check out their VGS Portfolio Data section.
Vanguard International Shares ETF has provided returns slightly above its benchmark index, with an average return of 11.74% since inception in November 2014. This makes the fund very young, with only 6 years worth of performance data currently. This is broken down into 9.6% annualised capital growth and a dividend yield of 2.1% (which is unfranked as the ETF does not contain any Australian shares).
In my opinion, 6 years is not a long enough time frame to get an understanding of its long term performance, and it is also important to remember that past performance is no indicator of future performance and the price of VGS could go up or down depending on market conditions.
I expect that VGS should have a decent long term performance based purely off the fact that it is a low-cost global index ETF with over 1500 holdings and therefore holds an exceptional number of profitable, blue chip companies. I find it highly unlikely that all of these companies would suddenly all start performing badly or go bust at once (although COVID-19 has shown us the impact that a pandemic can have on particularly smaller companies right across the board). I think volatility or poor short term performance is probably more likely going to be linked to investor sentiment and fear.
VGS has a Management Expense Ratio (MER) of .18% or 18 basis points. This means an investment of $10,000 in Vanguards VGS ETF would cost you $18 per year in management fees. This is subtracted from your return so you won’t actually ever pay this fee directly.
In my mind, this is fairly high for an ETF and I think it would be better to see this MER down closer below .10%.
Currently, I get my international exposure from two Vanguard funds; Vanguard Total US Shares (ASX:VTS) and Vanguard Global Shares ex-US (ASX:VEU). Switching to Vanguard International Shares ETF (ASX:VGS) would simplify my portfolio as it would mean I would only have to choose between two core ETFs instead of three when re balancing or building my portfolio; my decision would then only be between Australian ETF Betashares A200 (ASX:A200), and Vanguard International shares (ASX:VGS).
Exploring the issue a little more deeply, VGS is made up of about about two thirds US market. Holding an equal weight of VTS and VEU in my portfolio would give me a little less exposure to the US market – down to 50% rather than 68% I would get from VGS alone. Thus holding the VTS + VEU provides greater international diversification.
In terms of share ownership, VTS (3464) and VEU (3455) have a total of 6,919 underlying company share holdings, compared to VGS 1547 holdings. Also, VEU provides a bit more diversification into China with companies like AliBaba, Tencent, Nestle SA and Roche Holdings (some of these are still in VGS, just in smaller percentages).
In terms of Management fees, an equal weight of VTS and VEU would give an average Management Expense Ratio of .055%, or 5.5 Basis points (which is the average of the MER of VEU at .08%, and VTS at .03%). For some reason, the Vanguard VGS fund has a MER of .18%, or over three times the cost of VTS + VEU. In this regard, I personally prefer holding VTS + VEU over VGS.
You might also consider the extra cost of brokerage for re balancing – this would be lower with an A200 + VGS core holding rather than an A200 + VTS + VEU core holding, since you have less ETFs to balance – in my scenario this is negligible. In the accumulation phase I re-balance by buying and the number of funds doesn’t matter because I only ever put it all into one ETF per transaction. I plan in the retirement phase to only re-balance once per year by selling off a portion of the best performing fund to supplement my dividends and roughly keep my portfolio splits in line. Brokerage is only around $10 anyway – with over $10K of ETFs, you save this much on the reduced MER by holding VTS + VEU anyway.
VGS is domiciled in Australia which is a bit of a bonus. This means you won’t need to fill out a W8BEN form for tax compliance with the IRS like you have to with the VTS+VEU combo. This gives rise to a tax discussion into the whole VTS and VEU versus VGS debate regarding tax inefficiencies. After a little research and reading some pretty well thought out and written articles and forum entries (such as this forum), I came to the conclusion that the VTS and VEU foreign tax inefficiency drag brings the total effective MER for a VTS+VEU combination up to around .20% or 20 basis points for most people (above a 15% tax bracket, which most of us are).
Given the VGS has a MER of .18%, it means it is actually cheaper but really isn’t much of a difference – 2 basis points is .02% and on a $200,000 balance works out to be $40 a year – or less than a carton of beer. You also get better diversification with the VTS+VEU combination rather than just VGS (otherwise you could look at including things like VISM and it just gets more complicated). Quite frankly I feel like I have wasted my time even spending a few hours on this haha – its almost like the A200 versus VAS debate that Aussie HIFIRE put to rest most eloquently.
Finally, the last consideration is control. Personally, I like the idea of separating my portfolio into Australian, US and international funds. I feel this gives me greater control over portfolio, and I can target the market I think I can get the most value out of, or which I think is the least risk based on my portfolio splits. Yes – this might be considered ‘fiddling’ but I somehow get a kick out of buying ETFs when a particular market is down. For example if the US market goes down the most – I buy VTS. Then if the Aus market goes down the most – I buy A200. I’m not sure this is exactly how ‘value investing’ works, but it seems to be working ok so far.
Vanguard International Shares MSCI Index fund (ASX:VGS) is an Exchange Traded Fund which tracks the MSCI World (ex-Australia) index to provide Australian investors with exposure to global stock markets. It is run by the worlds most trusted provider of ETFs (Vanguard). The ETF alone holds over (AUD) $2.2 Billion of some of the worlds biggest names such as Apple, Amazon and Microsoft, and is part of Vanguards wider international fund pool of nearly AUD $20 Billion. VGS holds 1547 individual global stocks, and has a Management Expense Ratio (MER) of .18% or 18 basis points.
Whilst I never provide financial advice or recommendation to buy or sell any financial products or investments, VGS is a popular option for international exposure for a long-term investor wanting to build a simple portfolio using only a few ETFs. Personally, I do not invest in VGS for my Financial Independence portfolio, and instead, go with a VTS + VEU split in line with my investing strategy. Remember though, just because I do something, doesn’t automatically make it appropriate for you.
Financial Disclaimer: CaptainFI is NOT a financial advisor and does not hold an AFSL. This is not financial Advice!
I am not a financial adviser and I do not hold an Australian Financial Services Licence (AFSL). In this article, I am giving you factual, balanced information without judgment or bias, to the best of my ability. I am not giving you any general or personal financial advice about what you should do with your investments. Just because I do something with my money (or use a particular service or platform) doesn’t mean it is automatically appropriate for your personal circumstances. I do not recommend nor endorse any financial or investment product, and my usage or opinion of any product should not be interpreted as an endorsement, advertisement, or intent to influence.
I can only provide factual information based on my journey to Financial Independence, and that is provided for general informational and entertainment purposes only. I make no guarantee about the performance of any product, and although I strive to keep the information accurate and updated as it changes, I make no guarantee about the correctness of reviews or information posted.
Remember – you always need to do your own independent research and due diligence before making any transaction. This includes reading and analysing Product Disclosure Statements, Terms and Conditions, Service Arrangement and Fee Structures. It is always smart to compare products and discuss them, but ultimately you need to take responsibility for your use of any particular product and make sure it suits your personal circumstances. If you need help and would like to obtain personal financial advice about which investment options or platforms may be right for you, please talk to a licensed financial adviser or AFSL holder – you can take the first steps to find a financial advisor by reading this interview, or by visiting the ASIC financial adviser register and searching in your area.
Captain FI is a Retired Pilot who lives in Adelaide, South Australia. He is passionate about Financial Independence and writes about Personal Finance and his journey to reach FI at 29, allowing him to retire at 30.
12 thoughts on “Vanguard International Shares MSCI Index fund (ASX:VGS) ETF review”
Really glad you wrote this post as I hold VTS and VEU shares too, but have recently heard suggestions about using VGS. It’s given me something to consider in regard to basis points, control of US allocation and underlying company share holdings. I might stick with the VTS & VEU approach as well. Thanks for the detailed analysis.
No worries Jordan, my pleasure. I recently was doing the head scratching moments on the FIRE forums myself, and figured I might be able to save the next guy or girl the hassle. Next one on the list is VDHG
VGS is missing emerging markets which explains the higher US exposure. 10% VGE and optionally VISM for small caps is much closer to the VTS/VEU combo.
VEU also suffers from unrecoverable withholding tax drag, making the VTS/VEU combo very similar in cost to VGS/VGE but with the downsides of no DRP and potential US estate taxes. See https://passiveinvestingaustralia.com/fund-domicile-and-avoidable-us-taxes for more details.
Holy crap Rob, you have thoroughly sucked me into the rabbit hole on this one. I’m still a bit confused but will keep researching and try to wrap my head around it. Thanks heaps for bringing this up.
I wouldn’t panic if you have already holding VTS/VEU. That combo is still very slightly cheaper, perhaps a 1-2 basis points or $100-200 per year on a $1M portfolio.
For someone starting out though, VGS really has very little downside offering DRP, no W8-BEN, estate tax risk etc.
Vanguard offers a Personal Investor Account that offers no ETF investment fees apart from a 0.2% pa fee capped at $600. Do you think this is a worthwhile way of buying their ETF’s?
This is out of date, VPI changed their fee structure on August 18. Zero fees but $9 brokerage now for their ETF’s. Personally I’d go with a CHESS broker unless I wanted to buy their managed funds.
Hi Jack, if you are making smaller transactions more often then the VPI could be slightly better. In light of recent updates ($9 brokerage and zero fee) I still think its a solid option. If they can offer a way to automate purchases and debiting your bank account, and the funds held are CHESS sponsored, then it would effectively replace the need for Pearler.
I will be retiring early next year (age 71). I am looking at investing in ETF’s but not sure which ones. I have considered VAS, VGS, VHGD. Could you please suggest a suitable portfolio of either Vanguard or any other ETF exchange products that may be of help. Also, upon choosing a suitable ETF, is it best to DCA and not put in a large amount all at once. e.g say $100,000. Thanks again for providing any help.
Hi jack, if you have a poke around the blog you will see this answered extensively. As a quick summary, I dont give financial advice, but if I had my time over again I would either look at VDHG or DHHF. Studies show the best way to invest is lump sum, however this can be emotionally charged and gut churning. You might feel safer splitting your investments up into weekly, fortnightly or monthly purchases over a 3,6,9 or 12 months, but it is likely the market will increase as statistically it goes up more than it goes down. Just comes down to personal preference
Hi CaptainFI, long time reader/listener, first time commenting.
I found it interesting that you say if you had your time again, you would look at VDHG or DHHF. I am 27 and about to start investing. I am currently deciding between VDHG/DHHF or VAS/VGS. I was probably leaning more towards VAS/VGS, however reading you say you’d look at one of the high growth ETFs has me questioning my decision. I am purely after growth as I have several years to invest before retiring.
G’day Matt, the beauty of the all-in-one funds like VDHG or DHHF is it really is set and forget, and you can let Vanguard or Betashares do your asset allocation. I find the three fund split (A200, VTS and VEU) useful because I can tinker and rebalance by buying rather than selling, so theoretically there should be less capital gains taxes during the accumulation phase. Splitting hairs though really, the behavioural aspect is more important to just keep buying and leave it alone. VAS/A200 and VGS is a solid combo that a lot use as you can then rebalance into either AUS (A200/VAS) or international (VGS) when appropriate. Its really up to you mate