Exchange-traded funds that track the S&P 500 pull in the bulk of assets from investors. The Vanguard S&P 500 ETF became the first ETF to top $1 trillion in assets in early June. The three largest ETFs by assets all track the S&P 500. But is this really the smartest place to invest your money right now?
It’s smart, for sure, to have a sizable chunk of your portfolio invested in the S&P 500 — that will never change. But right now, a smarter move might be to invest in an ETF that tracks international markets, like the Vanguard FTSE Developed Markets ETF (NYSEMKT: VEA).
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The Vanguard FTSE Developed Markets ETF invests in the major developed markets outside the U.S., mirroring the FTSE Developed All-Cap Ex-US index.
The portfolio holds about 3,870 stocks, spanning the gamut of developed-market international stocks. About 50% of the portfolio comes from European stocks, while 38% are from the Pacific region. Around 11% are from North America, excluding the U.S., while 1% are from the Middle East.
The top three holdings are two Korean tech giants, Samsung and SK Hynix, and the Netherlands-based semiconductor stock ASML.
Why VEA is a must-own
Over the past 12 to 18 months, international stocks have outperformed their U.S. counterparts, as investors have rotated out of overvalued U.S. large caps into cheaper international markets with growth catalysts.
VEA is up about 15% year to date, while the VOO is up about 10%. Over the past year, VEA is up 28% while VOO has returned roughly 26%. Over the longer term, the Vanguard S&P 500 ETF has comfortably outperformed VEA, but U.S.-based tech stocks have fueled the bull market.
But that may be changing. According to many Wall Street experts, including those at Vanguard, international stocks are expected to outperform U.S. stocks over the next decade.
Vanguard strategists anticipate higher returns for international, developed-market, ex-U.S. stocks than U.S. large caps over the next 10 years. Strategists at Charles Schwab and Goldman Sachs, among others, say the same thing. There is a confluence of factors anticipated to contribute to international stock outperformance.
The strategists cite overvalued U.S. large caps, a weakening U.S. dollar, and the broadening of artificial intelligence (AI) beyond U.S. large caps into international markets. There are also potential tailwinds from favorable policy changes, increased defense spending, and investments in Europe and the Pacific.
