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Foreign Affairs

Mike Zaccardi

NEW YEAR, NEW TRENDS. That theme continues to play out. So far in 2022, the U.S. stock market, as measured by Vanguard Total Stock Market ETF (symbol: VTI), is down 9.1%. Brighter conditions are found overseas, despite today’s geopolitical risks. Vanguard FTSE Developed Markets ETF (VEA) is down just 4.3% year-to-date, while Vanguard FTSE Emerging Markets ETF (VWO) is up 0.5%.

A sore spot for international investors has been small-cap stocks. Vanguard FTSE All-World ex-U.S. Small-Cap ETF (VSS) is down 7%. The fund holds both developed and emerging markets stocks.

Developed foreign market indexes are dominated by countries from Europe and the Pacific region, with Canadian shares sometimes also included. I like to geek-out on the sector composition of various exchange-traded funds (ETFs). The Vanguard FTSE Developed Markets ETF has an 18% weight in the financial sector and 15% in industrials stocks. Growth sectors like information technology and consumer discretionary make up about 20% of the fund. By contrast, the U.S. stock market has 38% in those two sectors.

Looking for exposure to value stocks, such as those in the financials and industrials sectors? You might be well served by owning an international developed markets fund.

What does Vanguard FTSE Emerging Markets ETF look like under the hood? It’s not that much different from the foreign developed markets fund, though it does have more exposure to the information technology and consumer discretionary sectors, thanks to its large 53% exposure to China and Taiwan. The Vanguard emerging markets fund offers a relatively top-heavy portfolio, with more than 14% in its top three positions: Taiwan Semiconductor, Tencent and Alibaba. By comparison, the largest holding of Vanguard Developed Markets ETF is Nestle at just 1.5%.

As for valuations, the developed markets fund sports a 14.3 price-earnings (P/E) ratio, while the emerging markets fund is even cheaper at just 12.3. The U.S. market is much pricier right now, with a P/E ratio of 21.8. You can dive into these figures yourself on sites like Vanguard.com and Fidelity.com. Forward valuations also indicate foreign markets are cheap.

Most of us have a home bias, but the numbers say we shouldn’t ignore overseas stocks. The global stock market, valued at more than $100 trillion, is about 40% foreign markets. While a 100% U.S. allocation worked well in the 2010s, this year offers a warning—that perhaps that sort of one-sided portfolio won’t always look so smart.

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Randy Starks
Randy Starks
9 months ago

Or alternatively, you can invest in XSOE (Wisdom Tree Emerging Markets ex-State Owned Enterprises ETF) to avoid state owned enterprises in emerging markets and have foreign exposure. And, IEFA (iShares Core MSCI EAFE ETF) for Large Developed Market Stocks. You can slice and dice ETFs all over the globe to suit your needs, i.e., ex-U.S, ex-Japan, ex-China, you name it. However in all of them, you get the good with the bad. Thus, VT gives you about the same, plus the U.S in one ETF. Not the best, but simple and covers the World of stocks.

Rick Connor
Rick Connor
9 months ago

Good reminder of why we need to fight the home team bias. thanks.

Mike Zaccardi
Mike Zaccardi
9 months ago
Reply to  Rick Connor

Thanks, Rick!

Scrooge_McDuck88
Scrooge_McDuck88
9 months ago

I like “VT” for global equity diversification, with a US anchor.

Mike Zaccardi
Mike Zaccardi
9 months ago

VT 0.3% exposure to Russia

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