The Vanguard MSCI Index International Shares ETF (ASX: VGS) did very well in the financial year that just finished. The exchange-traded fund (ETF) climbed around 20%, while the S&P/ASX 200 Index (ASX: XJO) only went up by approximately 10%.
The VGS ETF covers the global share market with a number of countries represented including the US, Canada, the UK, the Netherlands, Germany, and so on.
I think there are two main reasons why the Vanguard MSCI Index International Shares ETF did so well.
Low starting point
An investment return is decided by the starting price and the ending price.
Over the six months between 31 December 2021 and 30 June 2022, the price of the VGS ETF dropped by around 18%. So, the ASX ETF started FY23 at a sold-off level.
The strength of the return we've seen for the VGS ETF has just brought it back to that previous all-time high, as we can see on the chart below.
If we were looking at the return for the past 18 or so months, it hasn't moved at all. Nevertheless, owners of VGS ETF units did well during FY23.
What helped the VGS ETF recovery?
A key part of the ASX ETF's return during FY23 was the great performance by the tech giants.
Over the past year, we've seen the Apple share price go up by 36%, the Microsoft share price has gone up by 29%, the Tesla share price has risen by 20%, the Meta Platforms share price has climbed 70%, and the Nvidia share price has soared 183%.
The tech names have generated a significant share of the return for the Vanguard MSCI Index International Shares ETF. Not only have they done exceptionally well, but they were already among the fund's largest positions, meaning their returns have the biggest influence on the portfolio.
It is curious that so many shares have risen strongly over the last 12 months, considering interest rates are now much higher than they were then, with no mention of when rates may start falling.
Warren Buffett once said:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So, every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
It's hard to say what FY24 has in store in terms of investment returns, time will tell.
