🌐Going Global, Staying Smart: The VEA ETF Story

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Happy Thursday, ETF UNO community! Today, we're jet-setting across borders to explore a cornerstone of international investing: the Vanguard FTSE Developed Markets ETF (VEA). Suppose you've ever wondered how to diversify beyond U.S. stocks without venturing into the wilds of emerging markets. In that case, VEA might be your ticket.

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What is VEA?

VEA is a low-cost, broadly diversified ETF that tracks the FTSE Developed All Cap ex-US Index. This mouthful of a benchmark includes over 3,900 stocks from 24 developed markets outside the United States—think Japan, Canada, Germany, and the UK. Unlike many international ETFs, VEA covers all market caps (large, mid, and small), giving investors a comprehensive slice of global developed economies. With $191 billion in assets under management, this ETF is the largest in the international equity space.

Investors should look beyond U.S. borders for diversification. While U.S. markets have performed well over the past decade, market leadership often shifts over time. International markets frequently follow different cycles, presenting unique opportunities for:

• 📊Enhanced Diversification Benefits: Different economic cycles, monetary policies, and market dynamics mean international markets don't always move in lockstep with U.S. markets. This decorrelation effect can help smooth out portfolio returns over time.

• 💶Currency Exposure: When the U.S. dollar weakens, investments in foreign currencies can provide a valuable hedge. VEA's unhedged exposure to foreign currencies adds an extra layer of diversification to your portfolio.

• 💹Valuation Opportunities: International markets often trade at different valuations than U.S. markets. Many developed international markets trade at lower price-to-earnings ratios than their U.S. counterparts, potentially offering better value propositions.

How should investors incorporate VEA into their portfolios? Here's a framework to consider:

• Core Holdings Approach For long-term investors, VEA can serve as a core international holding, typically comprising 20-30% of an equity allocation. This provides meaningful exposure to international markets while maintaining a home-country bias that many investors prefer.

• Strategic Rebalancing Regular rebalancing becomes crucial when holding international ETFs. Market movements can shift your desired allocation over time, and periodic rebalancing helps maintain your target exposure while potentially capturing valuation opportunities.

• Factor Consideration VEA's market-cap-weighted approach means it naturally tilts toward larger companies. Investors seeking additional factor exposure might consider complementing VEA with:

  • Small-cap international ETFs for size factor exposure

  • Value-focused international ETFs for value factor exposure

  • Quality-focused international ETFs for quality factor exposure

VEA at a glance

ETF Issuer: Vanguard

Inception: 2007-07-20

Asset Class: Equity

Underlying Index: FTSE Developed All Cap ex US Index

Geographical Focus: Developed Markets (ex-U.S.)

Expense Ratio: 0.06% (as of last data point)

Dividend Yield: 3.22% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

VEA's performance history tells a story of both challenges and opportunities. Since its inception in July 2007, the fund has navigated through various market cycles.

While U.S. markets have outperformed international markets in recent years, it's crucial to remember that market leadership tends to be cyclical. Historical data shows that international markets have experienced periods of significant outperformance, particularly during the early 2000s and certain periods in the 2010s.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Unmatched Cost Efficiency: VEA stands out with its remarkably low expense ratio. This cost efficiency becomes even more significant when compounded over long-term holding periods, allowing more of your returns to remain in your pocket rather than going toward fund expenses.

2. Deep Liquidity and Trading Efficiency: With billions in assets under management and high daily trading volumes, VEA offers excellent liquidity and tight bid-ask spreads. This makes it an ideal vehicle for both long-term investors and those who may need to adjust their positions more frequently. The fund's size and efficiency mean you can enter and exit positions with minimal impact on your transaction costs.

3. Robust Index Methodology: The FTSE Developed All Cap ex US Index employs a transparent, rules-based methodology that ensures broad market coverage. The index's regular rebalancing keeps the portfolio aligned with market changes, while its float-adjusted weighting methodology helps prevent overexposure to stocks with limited trading liquidity.

Top 3 Reasons Not to Invest

1. Currency Risk: While currency exposure can provide diversification benefits, it also introduces volatility. A strengthening U.S. dollar can reduce returns from international investments when converted back into dollars. This effect was particularly noticeable during periods of dollar strength, such as 2014–2015 and 2022.

2. Economic Growth Considerations: Many developed markets face demographic challenges and potentially lower growth rates compared to the United States or emerging markets. Ageing populations in Japan and Europe, for instance, could impact long-term economic growth prospects.

3. Market Structure Differences: International markets often have different sector compositions compared to the U.S. market. For example, many developed markets have higher concentrations in financial services and industrial companies, with relatively lower exposure to technology sectors. This can lead to performance divergence during periods when certain sectors dominate market returns.

⚖️Global Growth, Local Risks

The Vanguard FTSE Developed Markets ETF (VEA) represents a sophisticated yet accessible way to achieve international diversification. Its combination of broad market coverage, cost efficiency, and liquidity makes it a compelling choice for investors seeking developed market exposure. While the path of international investments isn't always smooth, the fundamental case for global diversification remains strong. VEA provides a well-designed vehicle for capturing these opportunities while managing risks through broad diversification and developed market focus.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.