The Vanguard MSCI Index International Shares ETF (ASX: VGS) has seen a sizeable drop in 2022. It’s down by around 16% since the start of 2022.

For an exchange-traded fund (ETF), that’s a pretty hefty drop considering it represents a whole group of businesses.

How many businesses are in the VGS ETF? More than you can count on two hands, or even 100 hands. At the end of May 2022, there were 1,474 businesses in the ETF’s portfolio.

That’s a lot of underlying diversification in just one investment. The diversification is one of the main reasons to like the Vanguard MSCI Index International Shares ETF in my opinion.

The purpose of this ETF is about providing exposure to many of the world’s largest companies listed in major developed countries, according to Vanguard. Vanguard is one of the world’s largest asset managers and aims to provide cheap investment options for investors.

There are a few different reasons why I think this could be a good time to consider this compelling ETF, besides the high level of its holdings.

Geographic and industry diversification

One of the attractive things about this ETF is how the holdings come from around the globe. Of course, the US still gets the lion’s share (70%) of the allocation because that’s where a majority of the world’s biggest businesses are. But I like that approximately 30% of the portfolio is invested in other markets.

The following countries have an allocation of at least 2%: Japan (6.2%), the UK (4.5%), Canada (3.7%), France (3.2%), Switzerland (2.9%), and Germany (2.3%).

There are also a number of other countries with a weighting of more than 0.5%: the Netherlands, Sweden, Hong Kong, Denmark, Italy, and Spain.

But it’s not just geographic diversification that the ETF offers. It’s also spread across a wide array of industries. This means that during times like 2022, some gains in some industries (like energy) can offset the decline in other sectors (like IT).

I think the risks are lowered with the VGS ETF being invested across a number of sectors. At the end of May 2022, there were five sectors that had a double-digit weighting: IT (21.8%), healthcare (13.5%), financials (13.4%), consumer discretionary (10.8%), and industrials (10%).

Cheaper valuation

It’s easy enough to say a lower price is better.

However, with rising interest rates, the price of many businesses looks more compelling when looking at the price/earnings (P/E) ratio.

I think that a lower P/E ratio is more attractive when it comes to an index fund like this one.

At the end of May 2022, Vanguard MSCI Index International Shares ETF had a P/E ratio of 17.4 times. I think that’s a reasonable number considering the quality of its portfolio.

Quality holdings

Many companies in the VGS portfolio have attractive long-term growth potential, featuring numerous industry leaders in the US or even globally.

I’ll list the top 10 holdings: Apple, Microsoft, Alphabet, Amazon.com, Tesla, Johnson & Johnson, UnitedHealth, Nvidia, Meta Platforms, and Berkshire Hathaway.

To highlight how financially strong the businesses in the portfolio are, let’s look at the return on equity (ROE) ratio. This essentially measures the profit generation of the business, compared to how much shareholder money is invested/retained in the business. At May 2022, the Vanguard MSCI Index International Shares ETF had a ROE of 18.1%. That’s attractive in my opinion.

Foolish takeaway

While it’s possible that the VGS ETF could drop further, I believe this lower level now represents a good, long-term buying opportunity. Plus, it has an annual management fee of 0.18%, which is good value for what it offers in my opinion.

The post I think the 16% drop in 2022 makes this Vanguard ETF a buy appeared first on The Motley Fool Australia.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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 (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Microsoft, Nvidia, Tesla, and Vanguard MSCI Index International Shares ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson and UnitedHealth Group and has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Nvidia, and Vanguard MSCI Index International Shares ETF. 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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