VGS & IOO are two popular ASX-listed ETFs for Australian Investors seeking exposure to global shares. Both ETFs track the performance of some of the world’s largest companies including Amazon, Google, Apple, Johnson & Johnson, Berkshire Hathaway, and the list goes on!
While both ETFs broadly aim to provide investors with international exposure, there are some key differences between each ETF. This article aims to analyse those variances.
Before reading any further, please ensure you’ve read and clearly understand my financial disclaimer located at the bottom of this post.
Want to know more about the basics of ETFs?
If you’d like to freshen up on the basics of ETFs before I dive into my VGS vs IOO analysis, here’s a link to an investing basics article I wrote about the 6 things you should understand about an ETF before investing.
You can skip ahead to a certain part of the article using the links below ⬇️
- VGS Overview
- IOO Overview
- Price Comparison
- Asset Allocation
- Regional Exposure
- Sector Exposure
- Number of Holdings
- Performance Comparision
- Key Facts
- Final Thoughts
- Financial Disclaimer
To kick things off, let’s start with a brief overview of VGS and IOO.
First listed in 2014, Vanguards VGS provides investors with access to approximately 1,474 of the world’s largest, most established organisations. For perspective, the average market cap for a holding within VGS is $AUD 48 billion.
To do that, VGS aims to track the returns of the MSCI World ex-Australia Index. The index features large and mid-cap constituents across 22 of 23 developed markets countries defined by MSCI. With over 1,400 constituents, MSCI claim that the index tracks approximately 85% of the market cap of each country’s publically listed companies.
Similarly, to VGS, IOO is designed to provide Australian investors with exposure to global shares. However, IOO tracks a much smaller cohort of international organisations. IOO’s underlying index, the S&P Global 100 only accounts for the returns of the 100 global companies weighted by market cap.
IOOs underlying index criteria prioritises a potential constituent’s global exposure, sector representation, liquidity, and size. You can read more about the index’s methodology here.
Price – VGS vs IOO
Price can be a key factor when deliberating between ETFs. In this case, VGS has a lower management expense ratio or MER than IOO. VGS has an MER of 0.18% whereas IOOs MER is 0.40%.
10,000 Invested in VGS or IOO would cost you.
The cost for $10,000 invested in VGS would be $18, whereas the cost for every $10,000 invested in IOO would be $40. These fees are excluding bid/ask spread fees. You can read more about how ETF fees are deducted here.
A $22 dollar difference per year might not seem like much on $10,000 invested, however, let us consider the difference on $1,000,000 invested. Every $1,000,000 invested in VGS would cost you $1,800. The same amount invested in VGS would cost you $4,000.
Asset Allocation: VGS vs IOO
Both VGS & IOO are solely allocated to shares. Compared to other asset classes like bonds, and cash, shares are generally more volatile. That means they are not great at proving ballast to a portfolio during periods of share market volatility like cash or bonds. On the other hand, shares have generally outperformed other asset classes over the long term.
Investors with a shorter investing horizon or less tolerance to volatility often consider bonds, or cash to offset the risk of capital losses. That’s why Vanguard recommends VGS for investors with a “higher tolerance for the risks associated with share market volatility.” In addition, iShares suggests that IOO “is unlikely to be appropriate for a consumer with a short investment timeframe.”
Regional Exposure: VGS vs IOO
VGS & IOO provide Australian investors with exposure to companies headquartered all over the world. However, it’s probably not as much exposure as you’d think.
Approximately 70% of IOO & VGS’s underlying holdings are US companies. VGSs second largest allocation is Japan, contributing 6.3%, and IOOs second largest regional allocation is the UK, contributing 7.7%.
The reason both ETFs are dominated by US companies is that they are market cap (market cap = shares outstanding x current market price) weighted. And you guessed it, most of the world’s largest companies (when measured by market cap) are US listed.
It is worth pointing out that a company’s headquarters does not necessarily limit where it can generate revenue. Although US mega-cap companies like Amazon, Apple, Google & Microsoft are headquartered in the US, they are truly international companies. In 2020 the aforementioned companies earned 31%, 55%, 54% and 55% of their revenue outside of the US respectively.
Sector Exposure: VGS vs IOO
The most dominant sector for both IOO & VGS is technology, with each ETF holding a (20%+). VGS is slightly less concentrated within its 5 largest sectors, with the top 5 contributing 69.6%, whereas IOOs top 5 contributes 75.9%.
The differences in sector exposure between IOO and VGS aren’t dramatic by any stretch. The largest variance of 7.7% is in Technology, the highst weighting sector in both ETFs. The table below outlines what each ETFs sector weightings are and where their minute variances lie.
|Consumer Discretionary||10.7%||11.7%||IOO +1.0%|
|Consumer Staples||7.9%||11.8%||IOO + 3.9%|
|Real Estate||2.8%||0.7%||VGS +2.1%|
Number of Holdings VGS vs IOO
A standout difference between VGS and IOO is that VGS tracks almost 15x more companies than IOO. This is purely due to the differences in each ETFs underlying Index methodology. IOOs underlying index methodology limits only 100 companies within the index, whereas VGSs underlying index tracks over 1,400!
As a result, IOO tracks a far more concentrated group of large-cap companies. VGS on the other hand tracks a number of ‘smaller’ companies.
Performance: VGS vs IOO
In recent history, IOO has been the better performing ETF. Edging out VGS over a 1, 3, & 5-year period.
VGS hasn’t been listed for 10 years, however, a comparison between underlying indexes determines that the S&P Global 100 has earned an annualized return of 8.73%, and the MSCI World ex Australia Index has returned 10.73% over the same period.
Interestingly the S&P500 has outperformed both indexes over 10 years, returning 10.88%
Currency Exposure: VGS vs IOO
Both VGS & IOO are un-hedged against foreign fluctuations. Developed market currency fluctuations between countries isn’t something we can control. That’s why hedging can be useful for investors with shorter-term investing horizons or investors interested in reducing currency fluctuation uncertainty against their home, or desired currency.
Should you prefer to avoid taking the foreign currency risk, Vanguard and iShares both offer ‘hedged’ versions of VGS & IOO through VGAD and IHOO. Keep in mind that you will pay a small premium for choosing a hedged alternative.
|Unhedged ETF||Fee||Hedged ETF||Fee||Hedging Premium|
VGS vs IOO – Key Fact Comparison Table
Use this table to compare some of the key facts that separate VGS and IOO.
|ETF Issuer||Vangaurd||iShares (BlackRock)|
|Asset Class(s) Invested In||Shares||Shares|
|Benchmark Index||MSCI World ex-Australia Index||S&P Global 100|
|Dividend Reinvestment Plan||Yes||Yes|
|Currency Hedged||No (Hedged Version: VGAD)||No (Hedged Version: IHOO)|
|Dividend Yield (TTM)||1.9%||1.53%|
|Income Distribution Frequency||Quarterly||Semi-Annual|
|ETF Inception Date||November 2014||December 2000 (converted converted into an Australian domiciled ETF in the second half of 2018)|
|Domiciled||Australia||Australia (converted into an Australian domiciled ETF in the second half of 2018)|
|1 Yr Return p.a.*||2.68%||9.95%|
|3Yr Return p.a.*||11.5%||15.29%|
|5Yr Return p.a.*||10.65%||13.35%|
|Return Since Inception p.a.||11.59%||3.98%|
|Funds Under Management (FUM)||$4.6Bn||$2.5Bn|
|Number of Holdings||1,474||100|
|Top 10 Holdings||Apple Inc, Microsoft Corp,. Alphabet Inc, Amazon.com Inc, Tesla Inc, Johnson & Johnson. UnitedHealth Group Inc. NVIDIA Corp. Meta Platforms Inc. Berkshire Hathaway Inc.||Apple Inc, Microsoft Corp, Amazon.com Inc, Alphabet Inc (Class A), Alphabet Inc (Class C Johnson & Johnson, Exxon Mobil Corp, JP Morgan Chase & Co, Procter & Gamble, Nestle SA.|
|Top 10 Holding Concentration||The top 10 holdings represent 18.4% of the total ETF.||The top 10 holdings represent 49.1% of the total ETF.|
|Regional Exposure||United States (70%), Japan (6.2%), United Kingdom (5%), Canada (4%), France (3%).||United States (72%), United Kingdom (8%), Switzerland (6%), France (4%), Japan (3%).|
|Sector Exposure||IT (29%), Healthcare (13%), Consumer Discretionary (12%), Consumer Staples (11%), Financials, Communications, Energy, Industrials, Materials, Utilities, Real Estate, Other.|
While VGS is cheaper and more diversified in terms of the number of companies it tracks, it also hasn’t performed as well as IOO. That said, past performance is never a reliable indicator of future performance and shouldn’t be utilised to forecast future performance.
Different ETFs may suit different investors depending on their appetite for risk, and investing horizon. Both VGS & IOO have been designed for long-term investors, willing to accept short-term bouts of volatility in exchange for exposure to global shares.
If that is you then VGS or IOO may be great options. Hopefully, this article has provided some insight into a few key differences between each ETF that should be considered before investing.
Disclaimer: The information provided in this article is general in nature only and does not constitute personal financial advice about how you should manage your investments. In this article, I intend to provide factual, balanced information without judgment or bias, to the best of my ability.
My financial decisions (or use of a particular service or platform) are personal choices based on their specific circumstances and do not automatically make them appropriate for your personal circumstances. I do not recommend nor endorse any financial or investment product. My usage or opinion of any product should not be interpreted as an endorsement, advertisement, or intent to influence. I cannot and will not make a guarantee about the performance of any product, and although I strive to keep information on this website accurate and updated as it changes, I make no guarantee about the correctness of reviews or information posted. I am NOT a financial advisor and do not hold an AFSL.
You should also consider seeking the advice of an investment advisor who holds an Australian financial services (AFS) licence or is a representative of an AFS licensee. Be sure to work with someone who understands your investment objectives and tolerance for risk. Your investment advisor should understand these products, be able to explain whether or how they fit with your objectives and be willing to monitor your investment alongside you. You can find a financial advisor by visiting the ASIC financial adviser register and searching for one in your local area.