3 reasons why the Vanguard MSCI Index International Shares ETF (VGS) is a top buy

This is one of my favourite exchange-traded funds for a few different reasons.

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The Vanguard MSCI Index International Shares ETF (ASX: VGS) is one of the top exchange-traded funds (ETFs), in my opinion.

This ETF provides exposure to many of the world's largest companies listed in major developed countries.

There are numerous countries represented in the portfolio, though some weightings are very low.

At the end of July 2024, the major allocations include the United States (73% of the portfolio), Japan (6%), the UK (3.9%), Canada (3.1%), France (2.9%), Switzerland (2.5%), Germany (2.2%), the Netherlands (1.3%), and Denmark (1%). Allocations of less than 1% include Sweden (0.8%), Italy (0.7%), Spain (0.7%), Hong Kong (0.4%), Singapore (0.4%), Finland (0.3%) and Belgium (0.3%).

As you can already tell, this investment has a great deal of geographic diversification. But, there's a lot more to like than just the country exposure.

More diversification

The VGS ETF invests in more than 1,300 businesses worldwide, providing investors with excellent diversification and significantly reducing the risk of any particular business investment going bad enough to hurt the portfolio.

At the end of July 2024, the Vanguard MSCI Index International Shares ETF had the most exposure to big names like Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, Broadcom, Tesla, Eli Lillyand JPMorgan. Of course, the portfolio also includes many other recognisable names, like NetflixMcDonald's, Costco, and Visa.

This fund is also nicely diversified across different sectors. There are currently five industries with a double-digit weighting – IT (25.4%), financials (15%), healthcare (12%), industrials (11%) and consumer discretionary (10.2%).

High-quality

The portfolio holds companies that are typically among the best in the world at what they do.

Whether it's AI, supermarkets, online video, electronic payments, pharmaceuticals, online retail, banking, or software, these businesses are making strong profits and winning more subscribers/users/clients.

In fact, this particular group of businesses have, in my opinion, very strong economic moats. They have excellent competitive advantages, which make it hard for newer players to challenge them.

And remember, the VGS ETF is invested in so many companies that if there is a (relatively) smaller business whose share price is rocketing higher, such as Nvidia recently, then the fund will benefit, and that business will become a greater part of the portfolio.

Strong returns with potential for more

With a low management fee of 0.18% per annum, the net returns are not hindered by costs.

Thanks to the performance of the underlying businesses, the overall returns of the Vanguard MSCI Index International Shares ETF have been very good. Since its inception in November 2014, the VGS ETF has delivered an average return per annum of 13.2%.

It's impossible to predict with certainty what the future returns will be, so it's possible they won't be as good.

However, Vanguard says the portfolio has a return on equity (ROE) of 19.6%. That suggests the future profits retained within the businesses could earn excellent profits. If the price/earnings (P/E) ratio of the business (and overall fund) stays the same, this could unlock further share price growth at a similar rate.

I think the VGS ETF is a great way to access the global share market, and it can suit most people's portfolios.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Costco Wholesale, JPMorgan Chase, Meta Platforms, Microsoft, Netflix, Nvidia, Tesla, and Visa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Vanguard Msci Index International Shares ETF, and Visa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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