June 8, 2020 | Vanguard Perspective
A down market, such as the one we've recently experienced, affords you the chance to help clients redeploy their capital in order to help them achieve their long-term financial goals. You likely have clients locked into a home bias, not realizing how much a lack of global diversification can cost them over the long term. But, is now the time to give international investments a look?
By avoiding international stocks you 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
That's why we recommend you consider an allocation to international investments with our low-cost equity ETFs.
While international equities have lagged their U.S. counterparts lately, here are four excellent reasons to consider an allocation to investments outside of the U.S.:
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 of U.S. stocks.
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 can actually reduce portfolio risk.
The maximum volatility reduction benefit of adding an allocation to international equities occurs between the 20%–50% range.
Not all great stocks are found in the domestic markets, as companies based outside the U.S. make up nearly half of the value of stocks worldwide.
By only investing in U.S. stocks, your clients miss out on leading companies found in the emerging and developed markets. In fact, Alibaba, Tencent, and Nestle are among the top ten largest companies.2
International companies among the top 50 largest stocks in the world
Source: FTSE Global All Cap Index as of March 31, 2020.
Another reason to look beyond U.S. borders is the higher-yield-generating opportunities available outside of the U.S. While domestic dividend oriented strategies have fared well, international stocks can offer favorable dividend values.
An international portfolio has historically experienced a higher dividend yield than that of a U.S.- only portfolio.
Average annual yields, March 2010–March 2020
|Vanguard ETF||Ticker symbol||Expense ratio|
|Total World Stock||VT||0.08%|
|FTSE All-World ex-US||VEU||0.08%|
|Total International Stock||VXUS||0.08%|
|ESG International Stock||VSGX||0.17%|
|International Dividend Appreciation||VIGI||0.20%|
|International High Dividend Yield||VYMI||0.27%|
|FTSE Developed Markets||VEA||0.05%|
|FTSE Emerging Markets||VWO||0.10%|
|FTSE All-World ex-US Small-Cap||VSS||0.11%|
1 Sources: Vanguard, FactSet, and MSCI as of December 31, 2020.
2 Source: FTSE Global All Cap Index as of March 31, 2020.