The S&P 500 has experienced significant growth, rising by 27% over the past year. This surge can be attributed to several factors, including stronger-than-expected economic growth in the United States and anticipation of potential interest rate cuts by the Federal Reserve. Additionally, enthusiasm surrounding artificial intelligence has contributed to the upward momentum of the U.S. stock market.
However, despite this impressive performance, some analysts are anticipating a correction in the S&P 500 during 2024. A correction typically refers to a decline of at least 10% from the index’s recent peak. JPMorgan Chase has set a year-end target of 4,200 for the index, implying a downside of 17% from its current level of 5,070, while Morgan Stanley’s target of 4,500 implies a potential decline of 11%.
It’s important to note that not all Wall Street analysts share this pessimistic outlook. For example, Goldman Sachs recently raised its year-end target to 5,200, suggesting about a 3% upside. However, concerns exist among some analysts due to the relatively high valuation of the S&P 500, which currently trades at 20.4 times forward earnings, surpassing its 10-year average of 17.7.
Morgan Stanley’s chief investment officer, Lisa Shalett, highlighted the attractive valuations of non-U.S. equities compared to the S&P 500, indicating that now could be an opportune time to diversify portfolios with exchange-traded funds (ETFs) focusing on non-U.S. stocks. This approach may help mitigate risks associated with potential corrections in the U.S. stock market while capitalizing on opportunities in global equities.
The Vanguard Total International Stock ETF
The Vanguard Total International Stock ETF (NASDAQ: VXUS) provides exposure to a broad range of international equities, holding shares of over 8,500 foreign companies. This diversified portfolio encompasses both value and growth stocks from developed and emerging markets worldwide, excluding the United States.
In terms of regional allocation, the fund is most heavily weighted towards European equities, constituting 40.6% of its holdings, followed by Asia-Pacific equities at 27.1% and emerging market equities at 24.7%. North American equities and Middle Eastern equities make up the remaining portions at 7.1% and 0.4%, respectively.
Among its top holdings, the ETF includes prominent multinational companies from various sectors. The ten largest holdings in the Vanguard Total International Stock ETF are:
- Taiwan Semiconductor Manufacturing (1.6%)
- Novo Nordisk (1.2%)
- ASML (1.2%)
- Nestlé (1.0%)
- Samsung (0.9%)
- Toyota Motor (0.8%)
- Tencent Holdings (0.7%)
- Novartis (0.7%)
- LVMH Moët Hennessy Louis Vuitton (0.7%)
- Shell (0.7%)
These holdings represent a diverse array of industries and regions, offering investors exposure to leading companies across the global equity landscape.
Investors have often been advised to prioritize low-cost, S&P 500 index funds due to their consistent performance over the long term. However, there are compelling reasons to consider international diversification, even in the face of the S&P 500’s historical outperformance.
Firstly, research suggests that portfolios combining international and domestic stocks tend to outperform those limited to domestic equities over the course of an investor’s lifetime. Blending international exposure can enhance wealth accumulation, income generation, and overall portfolio resilience.
Secondly, given the current elevated valuations of the S&P 500, diversifying into international stocks presents an attractive opportunity. The Vanguard Total International Stock ETF offers a cost-effective means to access global markets, with its expense ratio of just 0.08% ensuring minimal impact on returns. For example, on a $10,000 investment, the annual fee would amount to a mere $8.
While the S&P 500 has historically delivered impressive returns, incorporating international equities into one’s investment strategy can provide valuable diversification benefits and potentially enhance long-term performance. The Vanguard Total International Stock ETF offers investors a straightforward and affordable avenue to capture opportunities in global markets while mitigating risks associated with overexposure to any single region or market segment.
How investors should think about asset allocation
While historical data indeed supports the case for allocating a significant portion of one’s portfolio to U.S. stocks, the current market dynamics suggest a potential shift in investment strategy may be warranted. The S&P 500 has consistently delivered strong returns over the past few decades, outperforming various asset classes including international equities, bonds, and precious metals.
However, the current valuation of the S&P 500, trading at a premium to its historical average forward earnings multiple, raises concerns about potential overvaluation in the U.S. stock market. This could signal a correction in the near future, potentially leading to a sharp decline in the index.
In contrast, the Vanguard International Stock ETF presents an intriguing opportunity for investors seeking diversification and potential outperformance. Given the relative valuation disparities between U.S. and international stocks, the Vanguard International Stock ETF may offer a more attractive investment proposition over the next three to five years. By allocating a portion of their portfolio to international equities, investors can mitigate the risks associated with overexposure to any single market and position themselves to capitalize on opportunities in global markets.