International ETFs Showing Signs of Life

Despite underperformance over the past two decades, don’t turn your back on foreign funds.

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Reviewed by: Allan Roth
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Edited by: Allan Roth

Not too long ago, I received an email that read, “I hope the international crash finds a bottom sometime soon. This is tough.”  

Though I obviously hoped that as well, I responded that investing is simple, but never easy.  

Right on cue, international stocks showed some encouraging signs. For the three months ending Dec. 9, the Vanguard Total International Stock Index Fund (VXUS) gained 3.67% versus the Vanguard Total Stock Index Fund (VTI) shedding 3.38%. That’s a difference of more than 7 percentage points! 

 

  3 Mo. YTD
Vanguard Total Stock (VTI) 3.67% -15.01%
Vanguard Total International Stock (VXUS) -3.38% -17.59%

 

While both the U.S. and international equities are down this year, international had lagged through September but now bests the U.S. by nearly 2.6 percentage points.  

Still, I’m far from celebrating, as it’s been a bloody 23 years for international, which has been trounced by U.S. stocks. In fact, it’s even lagging bonds, with bonds having the worst performance ever so far this year.  

 

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Perhaps it’s easier to explain the last three months than the last year. Over the past three months, the US dollar index fell 3.1%, while year to date, it’s gained 9.0%. With the surging dollar, the war in Ukraine, Western Europe facing an energy crisis, and multiple issues with China, I can’t explain why international is besting the U.S. 

Looking Ahead 

A great three months is a blip on a longer-term chart and far from a trend. I admit I’ve had a dozen years of pain sticking to my international stock allocation. Being human, I look for confirmation bias. Both Vanguard and Fidelity have their fund of funds such as target date retirement funds with roughly 40% of their stock allocation in international stocks. And I was thrilled that it seemed like all of my fellow speakers and panelists at the 2022 Bogleheads Conference were still committed to international stocks.  

Of course it was Jack Bogle himself who argued to avoid or have no more than 20% of one’s allocation in international stocks.  

International stocks comprise about 40% of the total world stock market capitalization. Years ago, it was well over 50%, but declined with a dozen years of underperformance. 

I’m committed to international stocks. It’s still 40% of the global market cap and I want to own it all. International is very different than the U.S. in the types of publicly held businesses, according to Morningstar as shown in the below table.  

International has less than half of the allocation to technology, and no industry surges forever. It also has significantly less health care. It does, however, have more basic materials, financial services and industrials. Which industries will do better over the next decade? I know I don’t know. 

 

US Vs. Non-US Sector Weights 

Sectors International US Difference
 Basic Materials 8.44 2.51 5.93
 Consumer Cyclical 10.77 10.70 0.11
 Financial Services 19.66 13.80 5.87
 Real Estate 3.48 3.45 0.03
 Communication Services 5.53 6.80 -1.27
 Energy 6.27 5.31 0.96
 Industrials 13.67 9.64 4.03
 Technology 11.09 23.10 -11.97
 Consumer Defensive 8.14 6.75 1.39
 Healthcare 9.68 15.20 -5.49
 Utilities 3.27 2.87 0.40
  100.00 100.00 0.00

Source: Morningstar 

 

Owning the world helps diversify sectors, foreign currency, and even political risk.  

My Advice 

Back in 2008, I recommended to clients that a third of their stock portfolio be in international. Because international had trounced the U.S. over the past five years, the typical response was “why only a third?” I recommend the same today and often hear, “I don’t want to go that high.” 

Morningstar research indicates that, over the 10-year period ending Dec. 31, 2021, international stock fund investors, who may buy and sell as prices rise and fall, earned 1.75 percentage points annually less than the funds themselves.  

Admittedly, we chase performance in U.S. stock funds as well, but to a lesser extent. I suspect that if international continues its recent outperformance, money will flow into international stock funds with investors buying high. 

So I tell clients they can pick any allocation they want, but they must stick to it. Going forward, I believe consistency will be even more important than picking the allocation in the first place.  

 

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.   

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is www.DareToBeDull.com. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter