VEU: Foreign Stocks Dirt Cheap Versus US Equities, Reiterate Buy

The US is eating the world. Earlier this week, Goldman Sachs reported that the domestic stock market now comprises a record 64% of the global equity arena. I put this to X, and the response suggested trepidation among individual investors. The case was made that some mean reversion could be on the horizon. Still, US bulls point to the dominance of the Mag-7 stocks and tech writ large. Moreover, slugging growth across many non-US economies remains a risk, particularly in China.

I reiterate my buy rating on the Vanguard FTSE All-World ex-US Index Fund ETF Shares (NYSEARCA:VEU). I see its valuation as attractive, though both absolute and relative price action has me concerned about the months ahead. Let’s lay it out.

USA Is Now 64% of the Global Stock Market

For background, VEU seeks to track the performance of the FTSE All-World ex-US Index. Vanguard notes that the fund provides a convenient way to get broad exposure across developed and emerging non-U.S. equity markets around the world through a passively managed portfolio construction strategy, using index sampling, according to the issuer.

VEU is a large ETF with more than $53 billion in assets under management and it features a very low 0.08% annual expense ratio as of January 22, 2024. Share-price momentum is poor, per Seeking Alpha’s ETF Grading system, and I will highlight price action trends later in the article. VEU pays a very high dividend yield compared to the S&P 500. At 3.4%, it is more than twice that of the US stock market while risk with VEU is actually quite low given its standard deviation and diversified portfolio. Finally, liquidity is strong with this foreign index ETF – its average trading volume over the past 90 days is more than 2.6 million shares while the fund’s 30-day median bid/ask spread is tight at just two basis points.

Digging into the portfolio, the 3-star, gold-rated ETF by Morningstar plots on the very top area of the style box, indicating that it is primarily a large-cap allocation. There is some mid-cap exposure, though. With a price-to-earnings ratio under 13 and long-term EPS growth of 10%, the PEG ratio is quite compelling today at 1.3.

VEU: Portfolio & Factor Profiles

VEU has a high percentage in Financials. That’s usually a low-growth, cyclical sector, unlike the Information Technology sector which often outperforms during bull markets and easing interest rates.

So, I encourage investors to carefully weigh the sector breakdown and how it differs from the US market. What I do like is that VEU’s portfolio is not at all top-heavy. No single stock makes up more than 1.21% of the fund and the top 10 largest positions account for just 9.7% of the ETF. I also researched and found that VEU’s dividend grew a solid 19% in 2023.

VEU: Holdings & Dividend Information

Seasonally, VEU tends to struggle from late January through mid-March, according to data from Equity Clock. This is a time of year that can be strong for the US Dollar Index (UUP) amid occasional flights to safety, so this is a cautionary indicator over the next several weeks before rallies have historically taken place through late April.

On average since 2007, February has averaged a loss of 0.4% while March has ended higher 56% of the time with an average gain of 1.0%.

VEU: Bearish Near-Term Seasonal Risks, Bullish in Early Q2

The Technical Take

While I like the valuation and assert that VEU offers important diversification benefits for US investors, the chart has some work the bulls must put in. Notice in the graph below that shares are stuck in a range between $49 and $57. This $8 zone has been frustrating for those with significant non-US exposure. If we see a rally through $57, however, then there would be an upside measured move price objective to the $64 to $65 area – about where VEU peaked in 2021.

With a drawdown that is nearing three years, a breakout would be welcome news. Moreover, take a look at the 200-day moving average – it is generally rising, suggesting that the trend is modestly to the upside despite the sideways price action lately. VEU is also working off technical overbought conditions as evidenced by the RSI momentum oscillator at the top of the graph. Finally, the volume by price indicator on the left side of the chart reveals a bit of an air pocket between $57 and $59, so a jump in shares could lead to a sharp near-term gain, in my view.

Overall, VEU remains rangebound, and investors should monitor $57 as resistance and $49 as support.

VEU: Persistent Trading Range, $57 Resistance

The Bottom Line

I reiterate my buy rating on VEU. I see the portfolio’s valuation as attractive with strong diversification and risk measures. The technicals are less sanguine, though.