Vanguard Is Bullish on Developed Markets Outside the U.S. — But How Can You Buy Them? These 2 ETFs Can Help.
Which stocks will be the big winners of the artificial intelligence (AI) boom? Until recently, many investors might have assumed that major U.S. growth stocks, tech names, and AI hyperscalers would be the biggest winners — after all, those companies are building AI tools that are at the center of excitement around AI. But what if that assumption is wrong?
In its most recent Market Perspectives report published in July, Vanguard said that some of the best AI stocks might not be U.S. growth stocks or even directly related to technology at all. The Vanguard research team wrote:
The next phase of the AI story is more about whether current investment translates into productivity gains for the broader global economy.
Vanguard believes that as the benefits of AI tools spread beyond the tech sector, companies, industries, and countries outside the U.S. might outperform U.S. growth stocks that have driven the first phase of the AI boom. If this analysis is accurate, international stocks in developed markets might be a better buy than U.S. growth stocks. These companies might be in the best position to profit from AI, even if they didn’t build the AI tools.
The 10-year forecast from the Vanguard Capital Markets Model® projects that developed markets outside the U.S. will outperform U.S. stocks, and especially U.S. growth stocks. Vanguard expects developed markets ex-U.S. equities to deliver average annual returns of 4.5% to 6.5% during the next 10 years, compared to 3.6% to 5.6% for U.S. growth stocks.
Let’s look at two international stock ETFs that could fit the strategy of investing in developed markets.
Image source: Getty Images.
State Street SPDR Portfolio Developed World ex-US ETF (SPDW): 2,436 stocks, five years of 9.8% annualized returns
If you want to buy developed world international stocks, this ETF makes it easy — it’s right there in the name. The State Street SPDR Portfolio Developed World ex-US ETF (SPDW +0.39%) lets you own 2,436 global stocks from developed markets.
The top countries represented in SPDW are Japan (21.8% of the fund), the U.K. (11.3%), Canada (10.8%), South Korea (7.9%), and France (7.2%). A total of 25 countries with advanced, wealthy, “developed” economies are included in this ETF.
Not every developed market international ETF includes South Korea, but this one does. Because of that, this fund holds top South Korean semiconductor stocks and memory chip stocks like Samsung Electronics(SSNLF +0.00%) and SK Hynix(SKHY +7.29%). Other top stock holdings in this ETF include Dutch semiconductor giant ASML Holding(NASDAQ: ASML), international banks from Canada, Japan, and the U.K., and Swiss pharmaceutical stocks Roche Holding AG(OTC: RHHBY) and Novartis(NYSE: NVS).
The State Street SPDR Portfolio Developed World ex-US ETF has delivered annualized returns (by net asset value) of about 9.8% for the past five years, 17.9% for the past three years, and 29.6% for the past year.
SPDR Index Shares Funds – State Street SPDR Portfolio Developed World ex-US ETF
Today’s Change
(0.39%) $0.20
Current Price
$52.13
Key Data Points
AUM
$42B
Dividend Yield
2.91%
Expense Ratio
0.03%
Top Holdings
SMSN
2.48%
ASML
2.04%
A000660
1.68%
Vanguard International High Dividend Yield ETF (VYMI): 1,565 stocks, five years of 14.1% annualized returns
Want another way to buy developed market stocks? The Vanguard International High Dividend Yield ETF (VYMI +0.02%) holds 1,565 stocks, mostly from developed markets, and the companies it owns are mostly value stocks likely to pay strong dividends. That mix of stocks could make this ETF a good way to diversify against U.S. growth stocks.
There are 45 countries represented in this global ETF, and the top holdings by market are Japan (11.5% of the fund), the U.K. (11%), Canada (9.2%), Switzerland (7.6%), and Australia (7.3%). The top 10 stocks held by this ETF include several international banks from Canada, Japan, Spain and the U.K., as well as Swiss pharma giants, energy major Shell PLC(SHEL -0.17%), and consumer staples maker Nestlé (NSRGY +2.26%).
The Vanguard International High Dividend Yield ETF has significantly outperformed the other fund, delivering annualized returns (by net asset value) of about 14.1% for the past five years, 21.5% for the past three years, and 34.6% for the past year.
Vanguard International High Dividend Yield ETF
Today’s Change
(0.02%) $0.02
Current Price
$104.61
Key Data Points
AUM
$20B
Dividend Yield
3.44%
Expense Ratio
0.07%
Top Holdings
HSBA.L
1.77%
NOVN.SW
1.59%
RY.TO
1.58%
Why buy SPDW or VYMI?
I don’t own either of these funds, but both seem like solid choices for a broadly diversified portfolio of international stocks at a low cost. The Vanguard fund charges slightly higher fees, with an expense ratio of 0.07%, while the State Street fund’s expense ratio is only 0.03%.
Both funds pay strong dividends. The trailing-12-month dividend yield for the State Street fund (as of Aug. 13) is 3%, while the Vanguard fund has paid an even higher dividend yield of 3.5%.
If you want to own a portfolio of only developed market stocks, go with SPDW. But if you are fine with accepting some emerging market stocks and want to focus more heavily on dividends, VYMI could offer a good combination of steady dividends and upside growth potential.
