VEU: No Reason To Be Ex-U.S.

Following a significant market downturn last year, the stock market surprised the world with strong returns year-to-date, especially led by US equities. For instance, the S&P 500 has returned ~20% since the start of year, driven by large US tech companies. With changing macroeconomic outlook, it may be worth reviewing the Vanguard FTSE All-World ex-US Index Fund ETF Shares (NYSEARCA:VEU) which provides global equities exposure excluding the US names, to understand the dominance of US equities and the potential for international stocks.

Officially, VEU aims to 'seek to track the performance of the FTSE All-World ex US Index and provide a convenient way to get broad exposure across developed and emerging non-U.S. equity markets around the world'. With that, the portfolio has a very diverse sector and regional distribution. Financial services, industrials and technology are the key sectors in the index, while its holdings are mainly from Europe, Asia Pacific, and Emerging Markets.

Meanwhile, it is also a large portfolio with over 3700 holdings, where its top 10 holdings take up ~10% of the portfolio. Most of its top holdings are actually large semiconductor names such as TSMC, ASML, and Samsung. Hence, the portfolio may have outsized impact on the ongoing 'chip war' between the US and China.

Performance & Peer Review

Despite strong equities performance year-to-date, VEU lagged behind other broad market benchmarks, such as ACWI which represents global equities (including US) and SPY which only represented top US holdings. It does have quite comparable returns as its peers (HAWX and DBAW) which tracked MSCI ACWI ex US and MSCI All World ex US respectively.

However, since January 2021, the fund has performed poorly and remained in the negative territory. This significantly lagged SPY and even its peer indices as well such as HAWX and DBAW, which should provide similar exposures as VEU. Hence, it does have a bad track record over recent years.

Risk Analytics

From the risk analytics standpoint, VEU has very similar annualized historical volatility as compared to its peers at 15%. The 5Y Bollinger chart below also visualizes the price volatility of VEU on a 3-month rolling basis, where it has been trading around the rolling mean - indicating steady price movement over recent months.

Relative to SPY, VEU has been underperforming since the start of the year, which tells a completely opposite story as compared to late last year when the US equities market was rough to investors.

Meanwhile, the rolling-beta chart also demonstrates the high (and growing) volatility of VEU relative to SPY. The large range of rolling-beta from 0.4 to 1.4 over this year can be concerning - as it may then be difficult for investors to gauge expected returns for such a portfolio, which varies largely on its relationship with the prominent US equities market. Its high beta also cannot be justified with its recent performance, which did not look great.

Fundamentals Deep Dive

Diving into the underlying fundamentals of VEU, the fund has a weighted-average P/E ratio of 12.7x, which is lower than 23x in SPY, but very similar to its peer indices. Across the top holdings, they are quite mixed across companies from different sectors. An outlier to emphasise is perhaps Moelis & Company (MC), which is a global independent investment bank that looks extremely overvalued.

Looking across the profitability metrics, they are mostly profitable, with decent return on equity and significant EBITDA margins for few. However, revenue growth is expected to drop for most companies operating in more traditional sectors such as finance, industrials, and energy.

Analysts price targets were relatively mixed, with strong sell recommendations on MC but very positive outlook on ROG - an engineered material company actually with quite significant US exposure.

Conclusion

Through its performance and risk analysis, VEU does not have a good track record against the other broad market and even its peer ETFs across different time periods. With US equities continuing to be the spotlight of global investors, especially driven by large growth names, it may be unwise to invest in an ex-US benchmark which does not actually serve better risk-adjusted returns.