Four reasons to embrace global investing

June 8, 2020 | Vanguard Perspective

Four reasons to embrace global investing

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.:

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 of U.S. stocks.

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.

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, 2020. Results from the model may vary with each use and over time. For more information, please see the last page.

Source: Vanguard Investment Strategy Group.

2. 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 can actually reduce portfolio risk.

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

The maximum volatility reduction benefit of adding an allocation to international equities

Notes: Non-U.S. equities 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.

3. Exposure to some of the world's top companies

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

  • Alibaba
  • AstraZeneca
  • HSBC
  • Nestle
  • Novartis
  • Roche
  • Taiwan Semiconductor
  • Tencent
  • Toyota

Source: FTSE Global All Cap Index as of March 31, 2020.

4. Higher dividend yield

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.

Global dividend yields

Average annual yields, March 2010–March 2020

Global dividend yields

Sources: Vanguard and FactSet as of March 31, 2020.

Invest overseas with our low-cost equity ETFs

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 Europe VGK 0.08%
FTSE Pacific VPL 0.08%
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.

Notes:

  • 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.
  • 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.
  • 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.