VPL - VPL: A Potential Outperformer Against The U.S.

2023-10-30 04:14:25 ET

Summary

• The era of US dominance in the stock market is over, and diversification outside of the US is becoming more important.
• The Vanguard FTSE Pacific ETF is a fund worth considering, as it aims to replicate the performance of the FTSE Developed Asia Pacific All Cap Index.
• VPL has a diversified portfolio with over 2,400 securities, primarily investing in growth-oriented sectors in Japan, Australia, and South Korea.

Invest for the long haul. Don’t get too greedy and don’t get too scared. - Shelby M.C. Davis

I really do believe the era of US only dominance is over. For over a decade, the US stock market was the only place to be. Any kind of diversification outside our borders lowered portfolio performance as large-cap tech dominated investment momentum. With lofty valuations, and a likely recession on the horizon, it seems plausible a new cycle emerges, and that's why the Vanguard FTSE Pacific ETF ( VPL ) is a fund worth keeping an eye on.

VPL is an exchange-traded fund that seeks to reflect the performance of the FTSE Developed Asia Pacific All Cap Index. It primarily targets common stocks in the Pacific region, employing a passively managed, full-replication approach. This means the fund aims to replicate the index it tracks as closely as possible, remaining fully invested at all times. This approach, combined with low expenses, helps minimize the net tracking error - the discrepancy between the fund's performance and that of its benchmark index.

ETF Holdings and Components

Knowing the components of an ETF provides insight into its investment strategy and potential for returns. VPL has a solidly diversified portfolio with over 2,400 securities, primarily investing in growth-oriented sectors in three major economic regions - Japan, Australia, and South Korea - with Japan making up nearly 60% of the holdings. That's not necessarily a bad thing, but as I've written about before, Japan could be a source of global stress given the way the bond market has recently been behaving relative to the Yen's depreciating value.

Top holdings in VPL include:

1. Samsung Electronics Co. Ltd. : A South Korean multinational conglomerate specializing in various industries, including consumer electronics, shipbuilding, construction, and more.
2. Toyota Motor Corp. : One of the world's leading automobile manufacturers based in Japan, known for its efficient production system.
3. BHP Group Ltd. : An Anglo-Australian multinational mining, metals, and petroleum corporation and one of the largest companies in the world by market capitalization.
4. Commonwealth Bank of Australia : One of Australia's largest banks, offering a full range of financial services.
5. Sony Group Corp. : A Japanese multinational conglomerate corporation producing a wide range of products and services in various sectors like gaming, entertainment, financial services, and more.

Samsung has the largest weight currently at just 3.21%. The strong diversification, combined with attractive valuation metrics like a Price-to-Earnings ratio of 13.6 and Price-to-Book ratio of 1.3x, makes for a strong fundamental case.

Peer Comparison

Comparing VPL to its peers provides a broader perspective of its performance and potential. In the realm of Pacific-region funds, VPL stands out due to its low expense ratio of just 0.08%. This is considerably lower than the average expense ratio of 0.61% for other Japan/Pacific region funds. Passive strategies largely end up performing the same overall, so what matters to me more here is the likelihood of the area the fund tracks outperforming. When we look at VPL relative to the S&P 500 ( SPY ), it does look primed to show some leadership after having gone sideways for some time.

Future Prospects

The economies of Japan, Australia, and South Korea, where VPL primarily invests, are relatively stable. However, they also face potential slowdown risks. For instance, Australia's economy heavily depends on natural resource extraction and export, which could face challenges with increasing demand for alternative resources. And with China slowing down, this remains a headwind for the overall macro backdrop. Still - VPL I think has the potential to outperform US markets broadly for years to come on a relative basis, which may be all one can hope for if we are entering a recession and more volatile period ahead.

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