2023-09-11 11:57:10 ET
Summary
- Consider investing internationally as US markets may be vulnerable and there is a valuation differential between the US and other countries.
- The Vanguard Total International Stock ETF offers extensive diversification, an attractive valuation, and a low expense ratio.
- While the momentum may not be there currently, VXUS is a good option for those looking to invest outside the US, especially if Technology momentum weakens.
I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful. - Warren Buffett.
US markets are clearly where all the momentum has been this year, and that may be exactly why now is the time to consider investing internationally. While I'm broadly negative on equities at this point in the cycle on the risk of a credit event, I think on a relative basis it makes sense if you're forced to own stocks to allocate internationally. One of the most effective ways to do this is through investing in the Vanguard Total International Stock ETF ( VXUS ).
VXUS seeks to replicate the performance of the FTSE Global All Cap ex US Index, which provides a comprehensive overview of stocks issued by companies located outside the United States. Launched in January 2011, the VXUS ETF has since become a favorite among investors seeking broad exposure to international markets. The fund is passively managed and stays fully invested. It offers access to nearly 8,000 stocks in developed and emerging markets, making it a top choice for those seeking to diversify their portfolio on an international scale.
Key Characteristics of VXUS
Valuation and Momentum
In terms of valuation, the VXUS ETF trades at a relatively lower price-to-earnings (P/E) ratio compared to U.S. equities. As of June 2023, the fund's P/E ratio was reported at 12.7x, a considerable discount to the S&P 500. This lower valuation, coupled with the fund's moderate momentum, makes it an attractive investment opportunity.
When we look at price action relative to the S&P 500 ( SPY ), it's been in a terrible 10+ year bear market - underperforming substantially. Short-term relative strength remains poor, but we are getting close to the 2020 COVID crash levels. With AI mania looking like it's finally abating through weakening Tech stocks, now could be a good relative contrarian trade.
Holdings and Diversification
When it comes to holdings, VXUS offers impressive diversification. The fund's ten largest holdings account for just 9.5% of its assets, with no single position weighing in at more than 2%. This level of diversification significantly reduces the risk associated with a single stock or sector, making the fund a solid investment option for those seeking to mitigate risk.
The fund's holdings span across various sectors, with financials, industrials, and consumer discretionary taking the lead. Tech is the 4th largest sector - something I consider a good thing given how stretched Tech is in general.
This of course is not the only international stock ETF out there, though I'd argue it's among the purest. Two other notable international ETFs are the Invesco International BuyBack Achievers ETF ( IPKW ) and the PIMCO RAFI Dynamic Multi-Factor International Equity ETF ( MFDX ). IPKW focuses on international companies that have reduced their share count by at least 5% in the past year, which can be an effective strategy but may involve more risk. Lastly, MFDX uses a multifactor approach, selecting companies based on a combination of value, quality, low volatility, and size. This strategy could potentially outperform in different market conditions, but it also requires a more active management approach. VXUS has underperformed both of these options this year, but I'm not sure for how much longer. Share buybacks are likely to be challenged as rates stay elevated, and multifactor investing tends to have good results over time, but the fund looks stretched on a relative basis.
The other thing to heavily consider here is the fund's exposure to the Financials sector. I've continuously argued that Financials oddly enough could outperform Technology (be down less) during a credit event because the sector has already suffered a lot relative to growth names. The Financials concentration makes this a value play, which means that a bet on international with this fund is inherently a style tilt away from growth (which has admittedly been the only game in town).
Wrapping Up: Is VXUS a Good Investment?
Given its low expense ratio, extensive diversification, and attractive valuation, the Vanguard Total International Stock ETF ((VXUS)) makes a compelling case for those looking to broaden their investment horizon beyond the U.S. borders. The momentum is of course not there, and all stocks get hit in a global credit event. However, I do think US markets are more vulnerable, and the valuation differential is hard to ignore between the US and everything outside the US.
As international funds go, this is a very good proxy for investing outside the US. Just keep in mind that if Technology momentum is not done (which again - I think it is), this likely continues to underperform for just a bit longer.
For further details see:
VXUS: Not A Bad Idea Now To Avoid U.S. Equities