While 2018 is still in its infancy, there are already signs of a prominent theme from 2017 extending into the new year. Year-to-date, four of the top 10 asset-gathering exchange-traded funds (ETFs) are ex-U.S. equity funds.
Last year, five of the top 10 U.S.-listed ETFs in terms of new assets added were ex-U.S. equity funds and that includes three of the top four for annual inflows. In other words, as the bull market in U.S. equities gets older and older, investors are actively looking for new value opportunities, plenty of which are found beyond U.S. borders.
Investors who are migrating to ex-U.S. are, not surprisingly, doing so with mostly low-cost ETFs and index funds. Indeed, international equity ETFs carry higher fees than equivalent U.S. products, but broad baskets of international stocks can be accessed cheaply and efficiently.
These seven Vanguard ETFs can help investors add international diversity while saving plenty on pesky fees.
Vanguard ETFs to Buy: Vanguard Total World Stock ETF (VT)
Expense ratio: 0.11% per year, or $11 on a $10,000 investment.
For investors who are skittish about dedicated international equity ETFs, there is the Vanguard Total World Stock ETF (NYSEARCA:VT), which allocates 52.6% of its weight to U.S. stocks. All of VT’s top 10 holdings — a group representing 9.1% of the fund’s portfolio — are U.S. stocks. That group includes Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN).
Outside of the U.S., VT’s largest geographic exposures are Japan, the U.K., Canada, France and Germany. This Vanguard ETF also allocates 9.3% of its weight to emerging-markets stocks. VT holds a whopping 7,954 stocks with a median market value of $42.1 billion.
As is par for the course with many Vanguard ETFs, VT is attractively priced. Its annual fee of just 0.11% makes it 91% cheaper than the average expenses of competing strategies.
Vanguard ETFs to Buy: Vanguard FTSE Emerging Markets ETF (VWO)
Expense ratio: 0.14%
Emerging markets funds are usually pricier than U.S. and developed-markets ETFs, but investors no longer have to endure extremely high fees to tap baskets of emerging equities. The Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) is the largest emerging markets ETF trading the in the U.S., and a big reason why is that this Vanguard ETF is also one of the cheapest funds tracking developing economies.
Last year, VWO surged 31.5%, topping the S&P 500 by nearly 1,000 basis points. Even after that impressive performance, some market observers believe the rally for emerging markets stocks is in its early stages. Some data points confirm as much.
This year, global economic growth “will be driven by emerging economies, in particular commodity exporters, with growth rates for the group as a whole rising to around 4.5 percent in 2018 and an average of 4.7 percent in 2019 and 2020,” Reuters reports, citing the World Bank.
Vanguard ETFs to Buy: Vanguard Emerging Markets Government Bond ETF (VWOB)
Expense ratio: 0.32%
Staying with emerging markets for a moment, the Vanguard Emerging Markets Government Bond ETF (NASDAQ:VWOB) is a fine alternative for bond investors looking for some added income beyond the piddly yields offered by U.S. Treasuries and other developed markets sovereign debt.
VWOB yielded nearly 5% over the trailing 12 months, which is well above the comparable metric on 10-year Treasuries. Bolstering the case for this Vanguard ETF are declining external financing costs for emerging markets governments.
“The Bank of America Merrill Lynch Emerging Market Corporate Bond spread, which measures the premium paid for owning bonds sold by corporations in developing markets against safer Treasurys, has compressed to 3.3 percentage points, the tightest since July 2007,” reports MarketWatch.
Plus, it is unlikely that any major emerging markets, excluding Mexico, will raise interest rates this year. VWOB has an average duration of 6.5 years.
Vanguard ETFs to Buy: Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
Annual fee: 0.13%
By focusing on widely followed benchmarks, such as the Russell 2000 Index, some investors would be apt to think small-cap stocks were laggards in 2017. That is true when it pertains to domestic small-caps. International smaller stocks were different, more positive beasts in 2017.
For example, the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEARCA:VSS) jumped 30.6% last year, more than doubling the returns of the Russell 2000. Yes, it is still early in 2018, but VSS is already out to another sizable lead over U.S. small-caps.
This Vanguard ETF holds nearly 3,600 stocks, over 20% of which are emerging markets names. Europe is the largest regional exposure at 38.1%. VSS is also one of the least expensive international small-cap ETFs on the market today.
Vanguard ETFs to Buy: Vanguard FTSE Pacific ETF (VPL)
Expense ratio: 0.1%
For investors looking to make a regional without the commitment of single-country exposure, the Vanguard FTSE Pacific ETF (NYSEARCA:VPL) is a compelling idea. This Vanguard ETF follows the FTSE Developed Asia Pacific All Cap Index and holds shares of companies based in Japan, Australia, Hong Kong, New Zealand and Singapore, among others.
As a cap-weighted fund, VPL features a massive weight to Japanese stocks of 59.1%. Australia and South Korea for another 28.5% of VPL’s roster. South Korea is included here because FTSE Russell, VPL’s index provider, classifies Asia’s fourth-largest economy as a developed market. Other index providers still classify South Korea as an emerging economy.
This Vanguard ETF is cheaper than 92% of rival funds.
Vanguard ETFs to Buy: Vanguard Total International Stock ETF (VXUS)
Annual fee: 0.11%
For devotees of the famed Vanguard Total Stock Market ETF (NYSEARCA:VTI), the international equivalent to that fund is the Vanguard Total International Stock ETF (NASDAQ:VXUS). VXUS features many of the same hallmarks that made VTI a resounding success, notably cheap, liquid, broad-based equity exposure.
VXUS holds over 6,200 stocks, almost 20% of which are emerging markets names. Europe and developed Asia-Pacific represent nearly three-quarters of this Vanguard ETF’s roster.
Indeed, VXUS is one of the most cost-effective international ETFs available. Just as importantly, valuations on its holdings confirm international stocks remain deeply discounted relative to domestic equities. The price-to-earnings ratio on VXUS is 15.7, well below the same metric on the S&P 500.
Vanguard ETFs to Buy: Vanguard FTSE Europe ETF (VGK)
Expense ratio: 0.1%
The Vanguard FTSE Europe ETF (NYSEARCA:VGK) topped the S&P 500 by 530 basis points last year and that there is a good chance that European stocks and ETFs such as VGK continue their redemption journeys this year.
Citigroup is forecasting an 18% gain this year for the Stoxx Europe 600 Index (not VGK’s index), implying Europe’s best performance against U.S. stocks in 13 years, according to Bloomberg.
VGK can hold stocks from Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The U.K. is the ETF’s largest country weight at 28.5% while France and Germany combine for over 30%.
As of this writing, Todd Shriber owned shares of VWO.