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AUD is falling, so is it a good time to buy Vanguard International Shares (VGS) ETF?


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Z volatility what the global equity market has seen in 2022, I think it’s a good time to start looking for ASX opportunities. However, the Australian dollar is falling. Does that mean now is a good time to look at Vanguard MSCI Index International Shares ETF (ASX: VGS)?

For readers who don’t know, it is exchange traded fund (ETF) aims to give investors access to the global stock market, mainly to Western markets such as the US, UK, Canada, France and Switzerland. It also has investments in Japan, Hong Kong and Singapore.

What’s happening with the Vanguard MSCI Index International Shares ETF?

Since the beginning of the year, the share price of the fund has fallen by approximately 15%.

An ETF’s performance is dictated by its underlying holdings.

There are about 1,470 holdings in this ETF that offer a variety diversification by country and sector.

I will not write a long list of holdings, but I will mention the largest holdings of the fund as of September 30, 2022. They were an apple, Microsoft, Amazon.com, Tesla, Alphabet, UnitedHealth, Johnson and Johnson, Exxon Mobil Companyand Berkshire Hathaway.

Many stocks are down in 2022 as investors factor in higher interest rates when thinking about valuations. Why do interest rates affect asset prices? Legendary investor Warren Buffett once said:

The value of every business, the value of a farm, the value of a home, the value of any economic asset is 100% dependent on interest rates because all you’re doing in investing is giving money to someone in exchange for what you expect the money to flow at over a period of time, and the higher the interest rate, the lower the present value. So every business by its very nature … its intrinsic valuation is 100% sensitive to interest rates.

What about the Australian dollar?

The Vanguard MSCI Index International Shares ETF is roughly 70% weighted to the US equity market. This means that the performance of the US stock ETF has a significant impact on the overall portfolio.

But the decline in the Australian dollar against the US dollar had the effect of mitigating the decline in unit price.

I think this can be illustrated by comparing S&P 500 Index (INDEXSP: .INX) to iShares S&P 500 ETF (ASX: IVV), which is an ETF that aims to track the same index for Australians.

In 2022, the S&P 500 fell 25%. That compares with the return of the ASX-listed iShares S&P 500 ETF, which fell just 12.4%. This is because the Australian dollar was 72 US cents at the start of the year and has now fallen to 62 US cents.

Therefore, in terms of the Australian dollar, the value of the portfolio of Australians decreased less.

Is it a good time to buy?

While the weaker Australian dollar has saved the Aussie from poor returns, it now means we can’t buy as much international stocks, especially US stocks, as we used to.

If or when the Australian dollar strengthens against the US dollar, this will also be a drag on Australian dollar-denominated gains. So in that sense, the much weaker Australian dollar has made it slightly more expensive to buy foreign stocks.

However, at the same time, it should be noted that American stocks fell. Even with a weaker Australian dollar, the Vanguard MSCI Index International Shares ETF is still down 15%. So I think it’s a much better value than it was at the beginning of the year.


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