Key Points
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U.S. megacap growth stocks such as Nvidia, Apple, Alphabet, Microsoft, and Amazon have altered the composition of major indexes like the S&P 500.
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The U.S. stock market is embedded in the fabric of the U.S. economy.
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The stock markets of most countries are less valuable than other asset classes, such as real estate and private industry.
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The five most valuable companies in the world are U.S. stocks Nvidia (NASDAQ: NVDA), Apple, Alphabet, Microsoft, and Amazon. And 16 of the world’s top 20 most valuable companies are U.S. firms.
The sheer size of these companies makes the S&P 500 (SNPINDEX: ^GSPC), Nasdaq-100, and index funds and exchange-traded funds (ETFs) linked to these benchmarks increasingly top-heavy. Meaning that just a handful of stocks and themes can drive performance, for better or worse.
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Concentration is amplified for investors with dual exposure to these massive companies through ETFs and their individual holdings. The focused structure has paid off big time for U.S. investors — as U.S. stocks have generally outperformed international stocks since the financial crisis of 2008.
However, some investors may be looking to diversify their portfolios by investing in leading international companies such as Taiwan Semiconductor Manufacturing (NYSE: TSM), Samsung Electronics (OTC: SSNLF), SK Hynix (NASDAQ: SKHY), and ASML (NASDAQ: ASML).
You won’t find these stocks in S&P 500 index funds because they aren’t U.S.-based. You also won’t find them in many popular growth ETFs, like the Vanguard Morningstar Growth ETF, which is benchmarked to a U.S.-specific index called the Morningstar U.S. Large Cap Growth Index.
Investors looking for an ETF built around international stocks have come to the right place. Here’s why the Vanguard Total International Stock ETF (NASDAQ: VXUS) may be worth a closer look in October.
Image source: Getty Images.
8,790 international stock holdings
The Vanguard Total International Stock ETF holds 8,790 stocks from around the world. Japan makes up 15.5% of the fund, followed by 8.7% of companies in Taiwan, 8.3% UK companies, 8.1% Canada, 7% China, 6.4% South Korea, 5% France, 5% Switzerland, 4.8% Gemmany 4.4%, India, 4.3% Australia, and 22.5% other.
So compared to the S&P 500, where a single stock like Nvidia makes up 8.1% of the Vanguard S&P 500 ETF (NYSEMKT: VOO), entire countries have similar weights in the Total International Stock ETF.
The Total International Stock ETF is far more diversified. The world’s largest semiconductor foundry operator — Taiwan Semiconductor — semiconductor designers and manufacturers Samsung Electronics and SK Hynix — and semiconductor equipment manufacturer ASML are the four largest holdings. But they account for only 8.7% of the ETF. Beyond that, each holding accounts for less than 1% of the fund because only three non-U.S. stocks (excluding Saudi Arabian Oil, which the ETF doesn’t own) have market caps over $1 trillion. For comparison, the four largest holdings in the Vanguard S&P 500 ETF make up 26.2% of the ETF.
The U.S. has no shortage of industry leaders even outside of tech-focused sectors. Berkshire Hathaway, JPMorgan Chase, Visa, and Mastercard are the world’s most valuable publicly traded financial stocks. Eli Lilly and Johnson & Johnson are the world’s most valuable healthcare companies. Even though they primarily focus on the North American market, Walmart and Costco Wholesale are so massive that they still rank as the world’s most valuable consumer staples companies. And ExxonMobil and Chevron are the most valuable publicly traded energy stocks that aren’t national oil companies like Saudi Arabian Oil.
The key takeaway is that even outside of the megacap tech-focused companies, most U.S. stock market sectors are dominated by just a handful of industry-leading names. Whereas sector leadership is far more spread out on the global stage.
A less expensive valuation and a higher yield than VOO
International markets have more of a value bent than the U.S. indexes. The Vanguard Total International Stock ETF has a price to earnings (P/E) ratio of 16.2 and yields 2.3% compared to a 25.2 P/E ratio and 1.1% yield for the Vanguard S&P 500 ETF. However, the growth prospects of U.S. stocks are also far superior. Nvidia, for example, trades at just a 24.6 forward P/E ratio even though it is forecasting high margins and 70% year-over-year revenue growth in fiscal 2028. Whereas many international stocks are valued more for their existing earnings and moderate growth prospects.
Still, the International Stock ETF may appeal to investors looking for a superior yield and lower valuation than an S&P 500 ETF. And it may surprise you to learn that the Total International Stock ETF charges a mere 0.05% expense ratio, which is only slightly higher than the Vanguard S&P 500 ETF’s 0.03% expense ratio. Massive pools of assets allow these ETFs to charge dirt cheap fees. The Vanguard S&P 500 ETF is the largest in the world — with $1 trillion in net assets. But the Total International Stock ETF is massive in its own right — with $164.9 billion in net assets.
U.S. stocks have structural advantages over international stocks
The Vanguard Total International Stock ETF is a good buy for investors seeking diversified exposure to U.S. stocks, which may be appealing to value and income investors, or folks looking to avoid amplifying their exposure to U.S. stocks they already own outright or through ETFs.
That said, even with the concentration and premium valuation, I still expect U.S. stocks to outperform international stocks over the long term. Many U.S. companies are incredibly well run and have operating leverage and pricing power simply unmatched by international firms. The U.S. also has superior investor protections, accounting laws, corporate governance, liquidity, and price transparency.
The U.S. stock market makes up by far the largest share of U.S. household wealth and is embedded in the structure of U.S. retirement savings through 401(k) plans, individual retirement accounts, and other vehicles. By comparison, many other countries have the bulk of household wealth and retirement savings in sovereign wealth funds, pensions, or real estate rather than their stock markets.
In sum, investors shouldn’t smash the sell button on U.S. stocks and set sail for international markets just because of premium valuations. Rather, the Vanguard Total International Stock ETF is a good way to balance a growth-focused portion with international stocks you can’t find in U.S.-linked index funds and ETFs.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Daniel Foelber has positions in ASML and Nvidia. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon, Apple, Berkshire Hathaway, Chevron, Costco Wholesale, Eli Lilly, JPMorgan Chase, Mastercard, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, Vanguard Morningstar Growth ETF, Vanguard S&P 500 ETF, Visa, and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
