Market Overview

International Diversification On The Cheap

International Diversification On The Cheap

Times are tough for global equity markets, and international markets have been among the worst offenders for much of 2018.

Investors considering ex-U.S. markets in 2019 may want to look at highly diversified, cost-effective exchange traded funds, such as the Vanguard Total International Stock ETF (NASDAQ: VXUS). VXUS is the international equivalent of the wildly popular Vanguard Total Market ETF (NYSA: VTI).

What Happened

VXUS targets the FTSE Global All Cap ex US Index. Increasingly, the allure of this fund is that it holds both emerging markets stocks (21.3 percent of its weight) and ex-U.S. developed markets fare. Additionally, VXUS's annual fee is just 0.11 percent, or $11 on a $10,000 investment, making it cheaper than 89 percent of rival strategies, according to Vanguard data.

VXUS “covers the entire investable market outside of the U.S., giving investors access to stocks of all sizes,” Morningstar said in a Friday note. “The exchange-traded fund's ultralow expense ratio and market-cap-weighted approach curb the cost of ownership, providing it with a significant advantage over its more expensive rivals.”

Why It's Important

VXUS definitely meets the mark when it comes to diversification. The Vanguard fund holds nearly 6,400 stocks, or more than quadruple the amount found in the MSCI ACWI ex USA Index. With a price-to-book ratio of just 1.5x and a price-to-earnings ratio of 12.7x, VXUS is indicative of the discounts available with ex-U.S. equities.

Over the long-term, VXUS has performed mostly inline with comparable strategies.

“The fund's total and risk-adjusted returns were similar to the category average between its launch in January 2011 and November 2018,” said Morningstar. “It remained fully invested, while its better-performing competitors were more defensive, giving them an advantage during this period of lackluster market performance.”

What's Next

Japan, the U.K. and China combine for 36.6 percent of VXUS's geographic exposure, and all three of those markets trade at lower valuations than U.S. benchmarks. VXUS also has some small-cap exposure, which can be useful.

“Smaller firms tend to be more closely tied to their local economies and therefore improve the fund's diversification,” according to Morningstar.

The research firm has a Gold rating on VXUS.

Related Links:

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A New Global Bond ETF

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