Vanguard Total International Stock ETF: Slower Growth And Limited Visibility
Summary
- VXUS invests in international large-cap and giant-cap stocks.
- Despite its low concentration risk to individual stocks, the fund has higher exposure to slower growth economies such as Japan.
- VXUS pays a 3.3%-yielding dividend and is trading at a discount to the S&P 500 Index due to its slower growth profile.
ETF Overview
Vanguard Total International Stock ETF (NASDAQ:VXUS) invests in international large-cap and giant-cap stocks. The ETF tracks the FTSE Global All Cap ex US Index, which includes over 7,000 stocks. These are quality large-cap or giant-cap stocks that have been through numerous economic cycles. However, the fund has a higher exposure to slower growth economies such as Japan. In addition, the outbreak of coronavirus may negatively impact stocks in its portfolio. Given limited visibility, we think investors may want to wait on the sidelines.
Data by YCharts
Fund Holdings
High exposure to Japan and China is not beneficial
VXUS provides investors with a good vehicle to invest in international markets. However, it has high exposure to markets such as Japan, United Kingdom, and China. As can be seen from the table below, Japanese stocks represent about 16.7% of the total portfolio. This is not beneficial as Japan's economy may be facing some challenging headwinds in the next decade due to its ageing population. In fact, it is facing structural decline in its population already. The country is expected to see its population decline by 5.6% in 2030 from the population level in 2017. In addition, Japan’s GDP is expected to only grow by 0.7% and 0.6% in 2020 and 2021, respectively (this was estimated before the outbreak of coronavirus). VXUS’ Chinese stocks may also be heading for a slowdown due to tensions between the U.S. and China and the outbreak of coronavirus. Looking forward, many global manufacturers are moving their production away from China in order to reduce the risk of having only one primary manufacturing base. Therefore, we expect China’s economic growth rate to continue to decelerate.
Source: Vanguard Website
No concentration risk in its top holdings
VXUS has a diversified portfolio with over 7,000 stocks in its portfolio. While concentration risk is high to a specific country, it is relatively low to any individual stock. As can be seen from the chart below, its top holding Alibaba (BABA) only represents about 1.4% of its total portfolio. In fact, its top 10 holdings only represent about 9.7% of its total portfolio.
Source: Vanguard Website
Market cap weighted approach reduces its turnover ratio
VXUS implements market cap weighted approach to select stocks to be included in its portfolio. This approach selects stocks ranked by their market capitalizations. There is a saying in the investment world that “the market is always right.” This approach basically trusts the wisdom of the stock markets to determine which companies are good companies to include. This approach effectively reduces the turnover rate as stocks don’t get swapped out of the portfolio that easily. This is evident in the fact that its 2019 turnover ratio was only 3.9% (as of fiscal year ended October 2019). This low turnover ratio allows it to charge a very low management expense ratio of 0.08%. In addition, stocks selected in VXUS’ portfolio are generally large cap or giant cap stocks. As the table below shows, about 39.5% and 33.7% of its portfolio of stocks are giant cap and large cap stocks, respectively. These are companies that have been through numerous economic cycles. In other words, these companies know how to weather a storm. Therefore, these companies should be better positioned especially in the current situation of the outbreak of coronavirus.
Source: Morningstar
Valuation not expensive relative to S&P 500 Index
VXUS is trading at a low valuation with a P/E ratio of 13.89x. This is significantly below the S&P 500 Index’s P/E ratio of 17.36x. Similarly, its price to cash flow and price to book ratios of 6.34x and 1.46x are significantly lower than the S&P 500 Index’s 11.03x and 2.82x, respectively. While VXUS is trading at a low valuation, we think this is justified because stocks in its portfolio have much lower growth ratio than the S&P 500 Index. As can be seen from the table below, its weighted average sales growth rate of 2.80% is lower than the S&P 500 Index’s 6.92%. Similarly, its cash flow growth rate of 4.94% is also lower than the S&P 500 Index’s 7.63%.
VPL | S&P 500 Index | |
P/E Ratio | 13.89x | 17.36x |
Price to Cash Flow Ratio | 6.34x | 11.03x |
Price to Book Ratio | 1.46x | 2.82x |
Dividend Yield (%) | 3.32% | 2.14% |
Sales Growth (%) | 2.80% | 6.92% |
Cash Flow Growth (%) | 4.94% | 7.63% |
Source: Morningstar, Created by author
Risks and Challenges
Currency risk
Since VXUS invests in international markets, its fund value can be impacted by the swing of foreign exchanges. Certain currencies such as South African rand can be much more volatile than currencies in the developed countries. China’s Renminbi can also be impacted by government regulation and trade tensions between China and the U.S.
The outbreak of coronavirus
The outbreak of coronavirus is quickly spreading to many parts of the world. This virus has the potential to quickly reduce economic activities throughout the world. If this virus can be quickly contained in the next few months, we think the impact will be limited. However, if this virus cannot be contained quickly, it may cause a significant decline in economic activities in the world. This will likely trigger a recession. In such a scenario, VXUS' valuation may be deflated.
Investor Takeaway
Besides its higher exposure to slower growth economies such as Japan, stocks in VXUS’ portfolio may be impacted by the outbreak of coronavirus that is spreading to many parts of the world. Given limited visibility, we think investors may want to wait on the sidelines.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
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Comments (1)
OR, take better advantage of HALF the population ALREADY IN Japan, WOMEN:- Participation rate is much lower than men
- Japanese women concentrated in part-time, low-paying jobs
- Women are only 1% of senior managers"Unsurprisingly, women bear the brunt of this unequal system. Of the women hired in 2018, almost three-quarters were shunted into irregular work. Fewer than half of working women hold full-time positions, compared to almost four out of five men."www.japantimes.co.jp/...www.catalyst.org/...The solution is living in your house. It is not built by Sony.