Foreign stocks peaked four months before the S&P 500 topped out. This time a year ago, there were already signs that the Vanguard Total International Stock ETF’s (NASDAQ:VXUS) bull run off the March 2020 lows was in jeopardy.
As a technician, I pay close attention to changes in momentum since those often happen before we see price turnaround. In the case of VXUS, it reached “peak momentum” in early 2021. Subsequent higher highs in price came on weaker RSI, as illustrated in the chart below. By the time early September rolled around, momentum had slowed considerably.
A broader topping pattern was well underway. It then wasn’t until the S&P 500 declined substantially off its Jan. 4 peak that VXUS really took a bearish turn.
VXUS: Bearish Momentum Divergence Last Year Amid A Broad Topping Pattern
For background on what exactly is in VXUS, Vanguard’s site and Morningstar have everything you want to know. The international ETF is about one-quarter invested in emerging markets while foreign developed markets make up the remainder. Europe and the Pacific regions are most of the fund.
VXUS: 25% EM, 75% DM
Sector-wise, investors get much more “value” exposure vs “growth” in VXUS vs. the U.S. stock market. Resource sectors, Energy and Materials, make up nearly 14% of the ETF while Tech and Discretionary are less than 23%. I expect VXUS to beat domestic equity funds in the years ahead based on a positive relative turn in value stocks underway.
VXUS: Sector Breakdown and Financial Metrics
Now more than ever, knowing what’s happening in the forex world is critical. With USDJPY notching fresh 24-year highs and not far from its loftiest reading since 1990, big exposure to Japan in U.S. dollars hurts performance. The yen vs USD is down a whopping 30% year-on-year. Meanwhile, UK’s pound sterling touched its weakest price, compared to the greenback, since 1985 on Wednesday. And we all know the downward price action in the euro this year, reaching and busting below parity against the buck.
VXUS: Japan, UK Currency Moves Important
All those currency moves make it a tough time to own foreign equities via VXUS as ex-US stocks must be converted back to USD. But is there an opportunity right now? I think so – for those with a long enough time horizon. Consider that the all-country world index ex-US trades at just 11.7 times forward earnings estimates, according to Yardeni Research. Of course, we don’t know what the “E” will be, but low-teens P/E valuations, like we see today, have historically led to solid returns looking ahead three to five years.
Valuations Across Regions: Cheap International Shares
What’s particularly encouraging about VXUS right now is that we have rarely seen 23% year-on-year returns in the fund. In each previous instance over the past 11 years, forward three-year returns have been great. While we might not be out of the woods, I think the same fate could happen, so being long here with a multi-year time horizon should prove lucrative. At the very least, long-term investors should ensure they have exposure to at least match the all-country world index’s composition.
VXUS: Down 23% From A Year Ago, Often A Good Time To Buy