June 24, 2022 | Vanguard Perspective

4 reasons to embrace global investing

With rising interest rates and inflation dominating the headlines, are your clients considering a shift in their portfolio allocation strategy? You likely also have clients who are locked into a home bias, not realizing how much this lack of diversification can cost them over the long term. Is international investing worth a look? There are some excellent reasons to consider an allocation to investments outside of the U.S.

Financial markets around the world change rapidly in response to news and events, and by avoiding international stocks your clients are excluding a large portion of the global opportunity set. In fact, international stocks, represent almost 44% of the global market—a figure too large to ignore.1

Recent extreme market volatility can afford you the chance to help clients redeploy their capital in order to help them achieve their long-term financial goals. Here are four reasons to embrace global investing.

  1. Changing market leadership

The rationale for diversification is clear—U.S. and international stocks often swap positions as performance leaders. What might the future hold as leaders potentially turn to laggards? Global diversification gives you a chance to participate in whatever region is outperforming at a given time.

Here you will see how stock market leadership has alternated in the past between the U.S. and international markets. Rather than choosing one region over another based on past performance, consider focusing on the long-term benefits of a global approach.

Trailing 12-month return differential between U.S. and non-U.S. stocks

This is a line chart that shows the difference in market leadership between the U.S. and international markets over the past 20 years. The line is below the mid-point from 2000-2010 which is when international stocks outperformed. From that point until a brief period from 2016-2018 the line is above the mid-point showing U.S. stocks outperforming with a downward line as it gets to 2022.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Notes: U.S. equities are represented by MSCI USA Index; international equities are represented by MSCI All Country World Index ex USA. Data as of April 30, 2022.

Sources: Vanguard, Thomson Reuters Datastream, and MSCI.

 

  1. Positive international outlook

U.S stocks have had a great run, but will that continue? While we believe the price/earnings ratios for stocks are some of the best indicators of future returns, we also recognize that you must take into account valuations from a fair-value standpoint, factoring in global economic and market changes.

Based on these valuations, the expected return outlook for non-U.S. stocks over the next 10 years is higher than that for U.S. stocks.

Global non-U.S. equity annualized returns

(in U.S. dollars)

This chart shows the 10-year future return projection ranges for U.S. and international stocks. Global non-U.S. equity annualized return range is 5.7%--7.7%. U.S. equity annualized return range is 2.6%--4.6%.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of March 31, 2022. Results from the model may vary with each use and over time. For more information, please see below.

Source: Vanguard Investment Strategy Group.

 

  1. Volatility reduction

Having a mix of international and U.S. stocks has historically tamped down the volatility in portfolios. Of course it's natural to be concerned about geopolitical risk, but having a mix of U.S. and international equities can actually reduce portfolio risk.

The maximum volatility reduction benefit of adding an allocation to international equities occurs between the 20%–50% range.

Change in portfolio volatility when including non-U.S. stocks in a U.S. portfolio, 1970–2020

This is a line chart with the horizontal axis being the percentage of equity allocation to non-U.S. stocks and the vertical axis being the change in portfolio volatility. The blue line dips the lowest between the 20% and 50% range and then makes a steep rise as volatility increases as allocation to non-U.S. stocks gets closer to 100%.

Notes: Non-U.S. equities are represented by MSCI World Index ex USA and U.S. stocks are represented by the MSCI USA Index from March 31, 1970, through March 31, 2020. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Sources: Derived from data provided by Vanguard and MSCI as of March 31, 2020.

 

  1. Higher dividend yield

Another reason to look beyond U.S. borders is the higher-yield-generating opportunities available outside the U.S. While domestic dividend-oriented strategies have fared well, international stocks can also offer favorable dividend values.

An international portfolio over the past 10 years experienced a higher dividend yield than that of a U.S.- only portfolio.

Global dividend yields

Average annual yields, December 2012–May 2022

This is a bar chart showing the dividend yield for U.S equities at 1.44% and then the longer bar showing the greater 2.73% dividend yield for non-U.S. equities.

Sources: Vanguard and FactSet, as of May 31, 2022. U.S. equities are represented by MSCI USA Index and non-U.S. equities are represented by MSCI ACWI Ex-USA Index.

 

Invest overseas with our low-cost equity ETFs

Consider adjusting your international equity allocation with our lineup of low-cost ETFs.

Vanguard ETF® Ticker symbol Expense ratio
Total World Stock VT 0.07%
FTSE All-World ex-US VEU 0.07%
Total International Stock VXUS 0.07%
ESG International Stock VSGX 0.12%
International Dividend Appreciation VIGI 0.15%
International High Dividend Yield VYMI 0.22%
     
FTSE Developed Markets VEA 0.05%
FTSE Emerging Markets VWO 0.08%
FTSE Europe VGK 0.08%
FTSE Pacific VPL 0.08%
FTSE All-World ex-US Small-Cap VSS 0.07%

 

1 Sources: Vanguard, FactSet, and MSCI as of March 31, 2022.

 

Notes:

  • For more information about Vanguard funds or Vanguard ETFs, obtain a prospectus (or summary prospectus, if available) or call 800-997-2798 to request one. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider’s assessment of a company, based on the company’s level of involvement in a particular industry or the index provider’s own ESG criteria, may differ from that of other funds or of the advisor’s or an investor’s assessment of such company.  As a result, the companies deemed eligible by the index provider may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics.  The evaluation of companies for ESG screening or integration is dependent on the timely and accurate  reporting of ESG data by the companies. Successful application of the screens will depend on the index provider’s proper identification and analysis of ESG data.
  • Investors cannot invest directly in an index. All investing is subject to risk, including the possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. Diversification does not ensure a profit or protect against a loss. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.
  • IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
  • The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
  • The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.