Portfolio perspectives

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Portfolio perspectives

Expert Perspective

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April 11, 2025

Each month, you'll have access to the latest insights from our Portfolio Solutions experts to help you address evolving issues that may affect your clients' portfolios. In this edition:

  • Uncertainty of returns, along with the potential benefits of diversification, form a strong case for international equities—despite a longstanding aversion by U.S. investors.
  • When implementing an investing strategy to hedge against unexpected inflation, make sure you and your clients understand the volatility and returns trade-offs that come with different asset classes.

 

Portrait of Chris Tidmore
Chris Tidmore, CFA
Senior Manager, Investment Advisory Research Center
Portrait of Chris Tidmore

Chris Tidmore

Senior Manager, Investment Advisory Research Center

Natalie Romeo portrait
Natalie Marvi-Romeo, CFA, CAIA®
Vanguard Portfolio Solutions
Natalie Romeo portrait

Natalie Marvi-Romeo, CFA, CAIA®

Vanguard Portfolio Solutions

Portrait for Edward Dinucci
Ted Dinucci, CFA
Senior Research Specialist, Investment Advisory Research Center
Portrait for Edward Dinucci

Ted Dinucci, CFA

Senior Research Specialist, Investment Advisory Research Center

Portrait of Ryan Geik
Ryan Geik, CFA
Senior Investment Consultant, Portfolio Solutions
Portrait of Ryan Geik

Ryan Geik, CFA

Senior Investment Consultant, Portfolio Solutions

Portrait of Chris Pettit
Chris Pettit, CFA, CFP®
Senior Strategist, Investment Advisory Research Center
Portrait of Chris Pettit

Chris Pettit, CFA, CFP®

Senior Strategist, Investment Advisory Research Center

International stocks

International equities: Past performance may not be indicative of future returns

Over most of the last 15 years, allocations to international equities have presented a significant pain point for advisors and their clients’ portfolios. There are plenty of backward-looking reasons for why U.S. equities have outperformed non-U.S. equities. Valuation and geopolitical arguments are being made for both “why U.S.” or “why non-U.S.” equities on a forward-looking basis. Vanguard discusses many of these issues in our 2025 market outlook.

U.S. investors are growing weary and becoming increasingly skeptical of the argument that low valuations alone justify investing in international equities. We often hear that international equities are cheap for a reason. Moreover, with current geopolitical tensions, tariffs, and the rise of AI, the reasons to potentially avoid international equities seem to be mounting. However, no one can predict future returns with certainty. It is this uncertainty, combined with the potential benefits of diversification, which form the strongest case for including international equities in an investment portfolio.

From a return perspective, the past 10 years have shown significant variability in the performance of developed-market countries, as shown in Figure 1. Despite the U.S. being the best-performing market overall, it was never the top performer in any single calendar year. The performance of individual countries has been unpredictable, with no clear pattern emerging. For instance, Israel, despite ongoing conflicts, was the best-performing market last year. 

 

Figure 1: No clear pattern of country performance, and U.S. has never been best any year

Calendar year and overall returns and rankings for developed market countries (2015–2024)

Figure 1. A "quilt chart" table depicts 18 economically developed countries, ranking them along the Y- axis by stock and bond market returns, with low returns positioned at the bottom and high returns at the top. The years 2015 through 2024 are listed along the X-axis , with the final column indicating "overall" and listing each country's average return as a percentage. Notably, no discernible pattern is evident to where countries place any given year. And while the United States ranked first overall with 13% returns, in none of the individual years shown did it rank as having the highest returns.

Source: Vanguard Investment Advisory Research Center calculations using data from FactSet, Inc., as of December 31, 2024.

Notes: Country and global total returns based on the market-cap-weighted mix of listed countries, as defined by the MSCI World Index. Total returns were calculated for each country using country returns in the respective years and over the entire 10-year window.

Past performance is not a 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.

When examining returns, the cyclicality of U.S. versus non-U.S. stocks becomes evident when all non-U.S. countries are considered collectively. Over shorter time periods, there is significant variability from one period to the next. Over longer time periods, there are larger and more prolonged swings in relative performance, as seen in Figure 2.

 

Figure 2: Performance leadership between U.S. and non-U.S. stocks has been cyclical

Trailing 12-month and 60-month return differentials between U.S. and non-U.S. stocks

Figure 2. A line chart shows relative stock performance (as percentages, with − 60% as a lower boundary and 40% as an upper boundary) along the Y- axis; and the years 1970 to 2024 on the X-axis.  Above "0%" is designated "U.S. outperforms" and below "0%" is designated "Non-U.S. outperforms. A pair of jagged lines (rolling one-year relative returns and rolling five-year relative returns) show the cyclicality over time between U.S. and non-U.S. stocks.

Source: Vanguard Investment Advisory Research Center analysis using data from Morningstar Direct as of December 31, 2024.

Notes: The figure shows the rolling one- and five-year relative return (annualized) differential between U.S. and international equities. International equity: MSCI World ex USA Index (USD) from 1970 through June 1994, MSCI All-Country World ex USA Investable Market Index (USD) thereafter. US equity: S&P 500 Index from 1970 through June 1994, MSCI USA Investable Market Index from July 1994 through June 2001, CRSP US Total Market Index thereafter.

Additional potential benefits of a global allocation within an investor's portfolio include lower volatility and exposure to a different mix of industries, companies, and currencies compared to a U.S. equity-only portfolio. Vanguard's paper “Not all great stocks are found in the U.S. markets” addresses the different company exposures that international equities offer and can be shared with your clients.

Predicting the best-performing market remains challenging, as we've seen this year with U.S. equities down 2.7% and international equities up 9.2% YTD thru March 7, 2025. Even more dramatic is that 11 Western European countries are up more than 10%. While no one knows if this performance trend will continue, an international allocation would have captured this benefit for client’s portfolios.

 

Figure 3: Having an international equity allocation would have captured early 2025 outperformance

 

Year-to-date returns for international equities, through March 26, 2025
Ireland 18.3%   Singapore 9.6%
Spain 24.9%   World ex-U.S. 9.2%
Germany 18.9%   Hong Kong 5.6%
Sweden 17.1%   Netherlands 6.2%
Finland 17.0%   Denmark −8.3%
Italy 19.8%   Portugal 2.5%
Austria 17.2%   Japan 4.9%
France 13.4%   Israel 0.3%
Switzerland 14.3%   Canada 3.3%
Norway 22.9%   Australia 0.3%
Belgium 7.8%   U.S. −2.7%
United Kingdom 10.6%   New Zealand −7.1%

Source: Vanguard Investment Advisory Research Center calculations using data from FactSet, Inc., as of March 26, 2025.

Notes: Country and global total returns represent the 23 developed markets and the market-cap-weighted mix of those markets as defined by the MSCI World Index.

For advisors considering how to allocate their clients' portfolios, the exact allocation to U.S. and non-U.S. stocks is less important than having a reasonable allocation to both. However, it's important to note that most assets and sub-asset classes will experience significant periods of underperformance, which may require advisors to defend the rationale for these investments.

Next steps to consider: How to implement an international equity allocation?

When considering an allocation to international equities, there are a number of options:

  • A broadly diversified index fund or ETF such as Vanguard Total International Stock ETF (VXUS).
  • Exposure through a custom index fund or ETF focusing on:
    • The premium dividend yield of international stocks, such as the index used by Vanguard International High Dividend Yield ETF (VYMI), FTSE All-World ex-US High Dividend Yield Index.
    • Defensive properties of a dividend growth index, such as the index used by Vanguard International Dividend Appreciation ETF (VIGI), S&P Global Ex-U.S. Dividend Growers Index.
  • For investors who prefer an active manager to target their international exposure, Vanguard partners with some of the most experienced investment managers in the world as subadvisors on our active funds. For instance, Wellington’s “all-weather” international core fund, VZICX, incorporates a multi-disciplinary approach that leverages the strengths of an extended investment team.

Looking to explore international equity options for your clients' portfolios? Connect with your Vanguard sales representative and request a conversation with one of our Portfolio Solutions specialists.

Inflation

Inflation-hedging considerations for a multi-asset portfolio

For investors, it may seem like 2025 is off to an accelerated start, with developments daily about evolving geopolitical dynamics and trade policies. Vanguard economists are continuously monitoring the environment and updating our perspectives and their potential implications accordingly. In the end, uncertainty is nothing new when it comes to investing—as we have all experienced many times over the past several years, whether it be the COVID-19 crisis, unexpected inflation post-COVID, or other market events.

Through it all, one thing that’s held steady in our conversations is how financial advisors are positioning their portfolios for the inevitable uncertainties of investing. As of late, a trending topic in many of our discussions has been preparing for and hedging unexpected inflation shocks.

From our portfolio construction consultations, advisors generally address inflation within their portfolios in a variety of ways. Real Estate Investment Trusts (REITs), Treasury Inflation-Protected Securities (TIPS, both short- and long-dated), and cash are the most common vehicles we find advisors utilizing for dedicated inflation protection. To a lesser degree, advisors have employed non-traditional assets, such as broad-based commodities and precious metals, for their inflation-hedging merits. Ultimately, allocating towards a specific asset or sub-asset class based on its relationship with inflation is a function of position sizing, portfolio funding decisions, and risk/return trade-offs within a multi-asset investment allocation.

Similar to how one examines a stock or bond portfolio’s beta to the overall market, Vanguard research has shown that betas to unexpected inflation can be estimated to understand how stocks, bonds, or any other asset may respond to short-term fluctuations in unexpected inflation. Following this approach, Vanguard’s Investment Advisory Research Center assessed various asset classes and sub-asset classes, including those that are commonly used within advisor portfolios as inflation hedges (See Figure 4).

 

Figure 4: Countering unexpected inflation carries volatility and inflation-hedging trade-offs

Unexpected inflation betas and returns volatilities across various strategies

Figure 4. A bar chart shows the unexpected inflation betas of different asset classes: Commodities, REITs, Listed infrastructure, U.S. equity, Gold, U.S. short-term TIPS, U.S. Tips, cash, and U.S. fixed income. The right side of the Y-axis shows volatility of the different strategies. The takeaway is that advisors looking for added resiliency against unexpected inflation in client portfolios must consider the potential trade-offs of an asset’s inflation coverage relative to its volatility when including it within a multi-asset portfolio.

Source: Vanguard Investment Advisory Research Center analysis using data from Morningstar Direct and Saint Louis FRED database as of December 31, 2024. 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: The figure shows the unexpected inflation betas of various asset classes over the period from January 1, 1999, to December 31, 2024. Unexpected inflation defined as the year-over-year percentage change in the Consumer Price Index for All Urban Consumers (not seasonally adjusted) less the University of Michigan survey of one-year forward inflation expectations. Inflation expectations were held constant between quarterly survey results.

Asset class data based on the following proxies: Cash as represented by the FTSE 3-Month T-Bill; fixed income as represented by the Bloomberg U.S. Aggregate Bond Index from January 1, 1999, through June 30, 2009, and the Bloomberg U.S. Aggregate Bond Index (Float Adjusted) thereafter; stocks as represented by MSCI USA Investable Market Index from January 1, 1999, to June 30, 2001, and CRSP U.S. Total Market Index thereafter; TIPS as represented by the Bloomberg U.S. Treasury Inflation Protected Securities Index; short-term TIPS represented 60% by the Bloomberg U.S. Treasury Inflation Protected Securities Index and 40% FTSE 3-Month T-Bill from January 1, 1999,  to August 31, 2002, and Bloomberg U.S. Treasury Inflation Protected Securities 0–5 Year Index thereafter; Commodities represented by the Bloomberg Commodity Index; REITs represented by the FTSE Nareit Equity REITs Index; Listed Infrastructure represented by the MSCI All-Country World Index Infrastructure Index; Gold represented by the S&P GSCI Gold Spot Index.

When determining which index to use and for what period, we selected the index that we deemed to fairly represent the characteristics of the referenced market, given the available choices.  

Here, our findings showed that there are trade-offs to safeguarding against short-term changes in unexpected inflation. For instance, while certain strategies, like commodities, maintain a high unexpected inflation beta, they are also highly volatile and produce wide-ranging returns relative to equities over short and long-term horizons. Conversely, other strategies, such as short-term TIPS, offer much less volatility and greater consistency against unexpected inflation, but potentially lower returns versus traditional fixed income over longer-term horizons. Thus, advisors looking for added resiliency against unexpected inflation in client portfolios must consider the potential trade-offs of an asset’s inflation coverage relative to its volatility when including it within a multi-asset portfolio.

Lastly, long-term investors may find solace in considering that, over the past five years, a traditional 60/40 stock/bond portfolio has returned 8.60% annualized, relative to headline inflation at 4.23% annualized over the same period (Source: Vanguard calculations using the Balanced Composite Index: 60% CRSP US Total Market Index representing stocks and 40% Bloomberg U.S. Aggregate Float Adjusted Index representing bonds; and YCharts, as of December 31, 2024), highlighting the potential inflation-hedging merits of a traditional balanced portfolio via real returns. For strategic allocators, diversification both across and within asset classes is key to weathering not only any potential volatility stemming from an unexpected uptick in inflation, but also any other volatility-inducing market event.

In weighing client needs with the trade-offs inherent to an inflation-hedging approach, consider these use cases and their accompanying products:

  • Short-term TIPS: Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
  • Broad TIPS: Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
  • Commodities: Vanguard Commodity Strategy Fund Admiral Shares (VCMDX)
  • REITs: Vanguard Real Estate ETF (VNQ)

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More Vanguard analysis

For additional expert insights, check out:

  • Advisor Trends: Find out how your portfolios stack up in comparison with your advisor peers.
  • Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
  • Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
  • ETF perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.

 

Notes:

  • For more information about Vanguard funds or Vanguard ETFs view detailed product information or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. 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.
  • 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.
  • All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
  • Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issues by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
  • CAIA® is a registered certification mark owned and administered by the Chartered Alternative Investment Analyst Association.
  • CFA® is a registered trademark owned by CFA Institute.
  • Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.