Young & Invested: The best global ETF

Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.

This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.

Edition 20

I often reiterate that I rarely invest in individual shares anymore. The reality is, I’m just not great at it. As much as I’d love to think I’ve carved out an investing edge, poor behaviour has gotten in the way and led to the decimation of a decent amount of my wealth in the past. What works best for me is an all-ETF portfolio.

In previous editions of my columns, I went through the beginner ETF portfolio and discussed popular Aussie ETF picks for the domestic allocation of a portfolio. This week I’ll be looking at the best global ETF for exposure to international developed markets.

Why do we care about international markets?

Most of us are invested in the domestic market—whether that be through capital markets or simply your labour capital. However, the Australian equity market only accounts for about 3% of the global market, meaning an exclusively domestic investing approach can result in concentration risk.

The Aussie market is dominated by the financials and materials sector, leaving investors privy to the whims of the cycles these sectors operate in. Furthermore, the ASX 200 has consistently underperformed the S&P 500, even with an additional 1.3% received on average from franking credits.

But finding global opportunity sets are not only important from a returns perspective but also to achieve diversification. Mark wrote a great guide on international investing which explores the merits and pitfalls in further detail.

Why not just invest everything in the US market?

US equities have dominated global returns for years. The chart below shows long term returns for the US vs other developed markets. We can observe a clear performance gap between the two. This may elicit questions as to why we can’t just load up on US exposure and disregard the rest of the developed world.

Figure 1: Ten-year performance of developed markets ex-US vs US markets. Source: Morningstar. Data as of June 6 2025.

This train of thought is often what results in performance chasing—a common psychological barrier to a well-diversified portfolio. But it is important to remember that diversification is a risk mitigation strategy, and not always a returns maximisation strategy. The reality is you will always find an asset that outperforms your portfolio retrospectively.

Figure 2: Think differently about global diversification. Source: Vanguard. Note: Charts show the final balance of a hypothetical $100 investment in the relevant MSCI indexes and in individual stocks for the 10 years ended December 31, 2024. 

The outperformance of specific markets relative to others does not imply the failure of a diversified portfolio. A more aggressive application of this logic can lead to excluding stock styles such as value because growth has outperformed and disregarding sectors outside of tech due to recent thriving performance. This logic never ends and investors can be left with an extremely concentrated portfolio, akin to placing it all on black in roulette because that’s what won the last 5 spins.

The point is nobody knows for sure.

One of my favourite investing analogies is the insurance policy. Imagine you have an investment with 50/50 odds of a 20% return and a 5% return. It’s hard to say this is an objectively bad investment due to the worst case still being reasonably positive. Given the odds, the expected value of this investment is actually 12.5%.

But what if you could take out an insurance policy that guaranteed you this 12.5% and eliminated the 50/50 odds. But it stipulated you either had to pay 7.5% if you got the high (20%) return or you would receive 7.5% if you got the lower (5%) return. I’d imagine most investors would take this insurance policy for the surety of a 12.5% return. This is how we can think about diversification.

Starting valuations are also important. Logically, the higher the starting valuation, the lower expected long term return. Currently the consensus for US equities implies they are overvalued whilst most European markets look relatively undervalued. Taking the market as a whole and considering the market capitalisation of each company, the European market is undervalued by ~2%.

What if I still want only US exposure?

Despite the above, it is undeniable that non-US equities have detracted from the returns of a US-only portfolio over the last decade.

The market attracts a flock of investors due to its size and liquidity as the biggest listed equity exchange in the world. Further, US companies tend to be global leaders whilst the Australian market has a domestic focus. Being home to the world’s largest multinationals means that investing in the US market can be a proxy for investing globally.

There are many reasons for the appeal of the US market, Shani sat down with leading financial commentator Danielle Ecuyer, to discuss why US equities can’t be ignored in a portfolio.

For those looking for an ETF that will give you exclusive US exposure, I wrote an article comparing iShares S&P 500 ETF (ASX: IVV) and Vanguard US Total Market Shares ETF (ASX: VTS), two popular options for US ETFs.

The best global ETF

There are currently over 350 ETFs available on the ASX.

Neither I nor the everyday investor has the time to sift through all of these, let alone do the adequate research involved in choosing one. To avoid falling down an infinite rabbit hole of ETFs, it is important to define selection criteria aligned with your investment strategy.

Below were my screening requirements when searching for global ETFs in a beginner portfolio:

• Criteria 1: Total cost ratio* (<0.25%) 
• Criteria 2: Gold Morningstar Medalist rating**  
• Criteria 3: Developed market equities  

Why we care about management fees

With collective investment vehicles, the fees discussion is critical. Unlike direct equity holdings, owning an ETF involves ongoing holding costs as well as transaction costs.

Morningstar research shows that lower-cost funds have a greater chance of outperforming their more expensive peers. Whilst an incremental difference of a few basis points between fees may appear negligible, it becomes a larger consideration (than transaction costs) when an ETF is intended to be held longer term. This is particularly relevant for a beginner investor.

Figure 4 shows a 10-year return on $10,000 in two funds: one with a 0.1% fee and the other with a 0.6%. We assume there are no additional contributions, both funds average investment returns of 8% pa, and the fee remains stagnant. As demonstrated below, the gap in returns becomes more significant over the long term.

Figure 4: Impact of fees. Source: MoneySmart. Author inputs.

Why no emerging market exposure?

Emerging markets tend to have lower correlation with developed markets therefore are often looked to as portfolio diversifiers. Most of us suffer from a bit of familiarity bias in the investing process. My preference to invest in only developed markets stem from my level of comfort.

Undoubtedly, there is considerable growth to be found in pockets of emerging markets, however investments in such geographies cross levels of comfort for many beginners. Furthermore, emerging markets require a higher level of engagement to continuously evaluate the political risk, economic volatility, regulatory and liquidity issues inherent in such markets. For these reasons that I exclude emerging markets when looking at global ETFs for beginners.

The results

The screening criteria led to three ETFs: Vanguard MSCI Index International Shares ETF VGS, Vanguard Ethically Conscious International Shares Index ETF VESG, SPDR S&P World ex Australia Carbon Aware ETF WXOZ.

Below I’ll be exploring Vanguard MSCI Index International Shares ETF VGS—the most popular fund of the three options.

Vanguard MSCI Index International Shares ETF VGS

VGS stands out as the largest Gold-rated,passively managed ETF, tracking the MSCI World ex Australia Index through a full replication strategy, which involves buying all the underlying securities in the parent index. With over 1300 constituents across 22 developed markets, the index aims to cover 85% of the adjusted market capitalisation of each country.

Diversification

The parent index provides good diversification, with the resulting portfolio effectively capturing most of the opportunity set available to its actively managed peers in the Morningstar category.

Notably, the US represents a significant portfolio of the index (72% as of April 2025), followed by Japan (6%) and the United Kingdom (4%). Most passive global indices will have US dominance, however given many US-listed companies are multinationals with a large global footprint, there is a greater global diversification benefit than the headline numbers suggest.

The index also remains well-diversified at a stock level, with the top 10 holdings representing around 23% as of April 2025.

Figure 6: Top 10 holdings in VGS. Data as of 30 April 2025.

Unsurprisingly, there is a notable 25% sector weighting to technology and 16%to financial services (April 2025), mostly driven by US dominance within the index.

Performance and costs

VGS forms a tough hurdle to beat for active peers in the global equity fund space. Over the trailing 5 and 10 years to May 2025, the ETF outperformed its category average by 1.73% and 1.58% respectively and on a net-of-fees basis. Below we see the growth of $10,00 invested in VGS at fund inception, which comfortably outperforms within its category.

Figure 7: Growth of $10,000 investment in VGS since inception. Data as of June 2025.

We view the TCR of 0.18% as reasonable. Notably, the fee has remained consistent since fund inception in late 2015 despite a steady increase in assets.

ETF valuation

I’ve applied our equity research share level valuation to the underlying holdings of the VGS portfolio, which screens at 0.98 price/fair value (May 2025). This indicates it is reasonably close to fair value.

What we think

Coined a top option for global equities, the VGS strategy stands to be among one of the best choices for global market exposure. Ultimately, there are plenty of quality global ETFs that sit outside my selection criteria. Investors must prioritise finding the one that aligns with their investment strategy and goals.

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*Total cost ratio: The total cost of an ETF comprises of holding costs and transaction costs. The latter is often determined by your broker whilst the holding costs are linked to owning shares in an ETF.

Morningstar’s total cost ratio (“TCR”) aims to identify the main component of the total cost of an ETF. The TCR is typically a percentage of the holding value. The TCR includes management or investment fees, performance fees, administration fees and any other fees for underlying funds or similarly outsourced fee arrangements. An investment with a TCR of 0.5% and a holding value of $1,000 would incur $5 in fees per year.

**The Morningstar Medalist Rating is a forward-looking analysis that aims to predict funds’ performance versus a relevant benchmark index or peer group. The three pillars of people, process and parent are used to evaluate ETFs.

Morningstar expresses the Medalist Rating on a five-tier scale running from Gold to Negative. Higher ratings denote our conviction in a fund’s ability to outperform and lower ratings indicating a lack of conviction.

The top three ratings of Gold, Silver, and Bronze all indicate that our analysts expect the investment vehicle to add value or “positive alpha” over the long term when compared with a relevant category index after accounting for fees and risk. Positive alpha simply means to outperform other ETFs in the category.