ASMLF - VEU: An Ex-U.S. Fully Diversified Passive ETF With A Low But Decent Yield

Summary

• Almost 60 percent of VEU’s AUM is invested in four sectors - ICT, financial, industrial, and healthcare. The fund generates decent yield and total returns.
• The strong US dollar, high sustained interest rate by the Fed, and slowing global economic growth are expected to weaken growth in equities in the short run.
• Due to a deep level of diversification, investing in prospective & high-growth sectors, and only in economies with high sovereign credit rating, VEU has a higher chance of success.

Vanguard FTSE All-World ex-US ETF ( VEU ) is an exchange traded fund (ETF) that invests in stocks of companies operating across diversified sectors in various global markets outside the United States. Over 85 percent of its assets are invested in large-caps, which are presumed to be stable companies, and the remaining funds have been invested in mid-caps. Overall, the fund is well diversified across issuers and fulfills the criteria of a traditional ETF, which investors purchase for diversification purposes. The fund generates a stable return, both in terms of yield and total return. Its portfolio is less risky than other global funds. However, strong US dollar, high interest rate by the Federal Reserve sustained over a longer period, and slowing global economic growth can make this fund riskier for US investors.

Vanguard FTSE All-World ex-US ETF Has a Fully Diversified Portfolio

Vanguard FTSE All-World ex-US ETF was launched and managed by Vanguard Group, Inc. It fully replicates the composition of FTSE All-World ex US Index. This index measures the investment return of stocks of companies located in developed and emerging markets outside the United States. Almost 60 percent of its entire assets are invested in four sectors - information and communication technology (ICT), financial, industrial, and healthcare. I have consistently opined that these sectors have high growth prospects in the coming decade. However, like the broader market, VEU also suffered huge price loss during this year. Otherwise, during the 5 year period between 2017 and 2021, the fund generated an annual average total return of 10.8 percent.

Vanguard FTSE All-World ex-US ETF was formed in 2007 and has been paying quarterly dividends for the past 10 years. It has a current yield of 3.53 percent. The fund is currently trading around $50 and has a very low expense ratio of 0.07 percent. VEU invests in almost 3700 stocks, and doesn't concentrate on a single or group of stocks. Its top 10 investments includes global brand names like Nestle SA (NSRGY), ASML Holding NV ( ASML ), Taiwan Semiconductor Manufacturing Co Ltd ( TSM ), Tencent Holdings Ltd ( OTCPK:TCEHY ), Roche Holding AG (RHHBY), Shell PLC ( SHEL ), AstraZeneca PLC ( AZN ), Novo Nordisk A/S ( NVO ), LVMH Moet Hennessy Louis Vuitton SE (LVMHF) and Novartis AG (NVS). These 10 stocks account for only 9.3 percent of the entire investments.

Vanguard FTSE All-World ex-US ETF Has Invested in Credible Economies

Almost 25 percent of its assets are invested in emerging markets, primarily in four countries - China, India, Taiwan and South Korea. These are the best performing emerging markets with respect to economic growth, size of the economy, and their sovereign credit rating . Within the developed market, a significant portion of investments were made in Japan, the United Kingdom ((UK)), Canada, Australia, France, Germany, Switzerland and the Netherlands. Together these 12 markets account for almost 80 percent of VEU's total asset under management ((AUM)) of $50 billion. It's quite clear what kind of markets this fund has opted for - large scale credible (having investment grade sovereign ratings) economies with established brands in diversified sectors.

I have seen that US based global funds have a tendency of investing in emerging markets with either non-investment grade sovereign ratings like Russia, Turkey, South Africa, Brazil, Nigeria, Egypt, Vietnam, etc. or in Energy-rich economies that lacks diversified growth such as United Arab Emirates ((UAE)), Qatar, Kuwait, Saudi Arabia, Mexico, Kazakhstan, Oman, etc. Vanguard FTSE All-World ex-US ETF, however, has invested in large, diversified, high growth economies with investment grade sovereign credit rating. Investments in these markets will enable this fund to generate high price growth. When it comes to the developed markets, although the growth rate of those economies is low, the stocks that VEU invests in are primarily spread all over the globe, and thus in a position to generate stable price growth.

Economic Slowdown and Increasing Dollar Enhances Risk of Global Funds

Worldwide the economies are in a low-growth phase. Central banks around the world have tightened their monetary policies in order to control inflation. Economic momentum took a hit in the past nine months due to Russia's invasion of Ukraine. Companies worldwide are increasingly becoming more concerned about cost-cutting and restraining from recruiting new workforce in light of the deteriorating economic situation. All these are creating a pressure on the margins of these companies. All these factors create an uncertainty regarding volatility of these stocks, and thus these stocks become a bit risky. The increasing rates of the US dollar further makes the returns of such non-US companies unattractive.

The dollar has recorded a multi-decade high growth in its values. This has resulted from an unprecedented shift in monetary policy and weakening foreign currencies. As the foreign currencies weaken, the demand for dollar collateral keeps on increasing in the global financial system. On top of that, the unprecedented geopolitical tensions are making the dollar even more valuable, and perhaps the only safe form of liquid investment available worldwide. A dollar reversal in the near term is quite unlikely, and the outcome will be largely impacted by the direction of Ukrainian conflict, Fed's monetary policy, and global economic growth. Until then, international stocks carry considerable foreign exchange risk and carry an additional degree of risk.

While I don't expect an exceptionally strong yield and total return in the short run, due to the fund trading around the pre-covid price level only, I don't find any rationale behind selling this fund. The price has come down by more than 20 percent from a 52-week high of $62.7. So, even if an investor is planning to quit from this stock due to the perceived risks mentioned above, I don't think this is the right time. At the same time, I don't suggest accumulating this fund at the current price level. It'll thus be best for existing investors to hold Vanguard FTSE All-World ex-US ETF for the time being. For reference, VEU is trading almost at par with its net asset value ((NAV)) of $50.48.

Investment Thesis

For investors seeking geographical and sectoral diversification, Vanguard FTSE All-World ex-US ETF is a good option. The political and economic environment in the coming years surely poses a challenge for this fund. A strong US dollar, high interest rate by the Federal Reserve sustained over a longer period, and slowing global economic growth is expected to contribute towards a prolonged weakness in equity markets around the globe. However, due to a deep level of diversification, investing in prospective high growth sectors and only in economies with high sovereign credit rating, the fund has a higher chance of successfully generating strong returns in the long run.

For further details see: