To The Moon

Summary

• I maintain a buy rating on VEA due to its attractive valuation, strong diversification, and higher dividend yield compared to US equities.
• VEA's underperformance relative to the S&P 500 is due to its lower exposure to tech and higher exposure to cyclical sectors.
• The US Dollar Index's stability in 2024 has been a tailwind, but VEA's diversified holdings have limited its alpha generation.
• Seasonal trends and technical resistance suggest potential near-term volatility, but the long-term uptrend remains intact.

imaginima

The Vanguard FTSE Developed Markets Index Fund ETF (NYSEARCA:VEA) has been a serial underperformer compared to US equities. It primarily has to do with the sector makeup of the two sections of the global stock market. The ex-US developed market has much more exposure to cyclical areas like Financials, Industrials, Materials, and Energy. Information Technology is more than 30% of the S&P 500 but just 11% of VEA. Naturally, as tech has outperformed all other sectors since the bear-market bottom in October of 2022, the S&P 500 has beaten VEA.

But a factor that also has key implications for the ETF compared to US equities is the US Dollar Index (DXY). The greenback is flat on the year after a strong beginning to 2024. That has been a tailwind for VEA on a relative basis, but the fund has not seen a ton of alpha in the last few months. The reason is that the US Magnificent Seven stocks keep winning, while the diversified VEA ETF has seen more measured advances.

I reiterate a buy rating on VEA based on valuation, but I will note some possible resistance on the chart and bearish seasonal trends that often ensue in September. Shares are up 6% total return since my previous analysis.

S&P 500 Sector Returns Since the October 2022 Low: Tech Leads

Yardeni

US Dollar Index Flat in 2024

TradingView

According to the issuer, VEA seeks to track the investment performance of the FTSE Developed All Cap ex US Index. The ETF provides a convenient way to match the performance of a diversified group of stocks of large, mid, and small-cap companies located in Canada and the major markets of Europe and the Pacific region. VEA follows a passively managed full-replication approach.

VEA has grown significantly since I last reviewed the fund in the first quarter. Total assets under management are now $198 billion, up from $184 billion in March. Its annual expense ratio remains very low at just 0.06% while VEA’s forward dividend yield is more than two times that of the S&P 500 ETF (SPY) at 3.18% as of August 30, 2024.

Share-price momentum has improved from earlier in the year as the ETF nears its all-time high. Risk ratings are likewise healthy given the portfolio’s diversification and somewhat light annual volatility readings. Finally, liquidity is robust as average daily volume is high at more than eight million shares and its median 30-day bid/ask spread is tight at two basis points, per Vanguard.

Turning to the portfolio, the 4-star, Silver-rated ETF by Morningstar plots along the top row of the style box, but there is a material 21% exposure to foreign SMID caps, so there is some cyclical access in that respect.

What’s particularly attractive about VEA today is that its price-to-earnings ratio is very low at 14.1 - nearly seven turns cheaper than the S&P 500’s. With long-term EPS growth above 10%, the resulting PEG ratio is just 1.4 - a solid bargain even after an 11% year-to-date total return through August.

VEA: Portfolio & Factor Profiles

Morningstar

VEA is much more diversified than the S&P 500, too. Financials is the biggest weight, but it’s only 20%. Moreover, the largest single stock is Novo Nordisk (NVO), but it’s just 1.7% of the fund. Thus, unlike the Mag 7, it’s unusual to see a handful of individual equities drive the ETF’s overall performance, which I like to see from a long-term investment perspective.

Dividend investors should also appreciate the allocation, as more weight to higher-yielding areas means bigger annual dividend payouts than US stocks.

VEA: Holdings & Dividend Information

Seeking Alpha

Where we run into risks is with seasonality. September is VEA’s worst month when scanning the last 10 years of return history. The median performance is down about 3% with VEA down in each of the past four Septembers.

The good news is that October and November have been positive months, but near-term volatility should be expected.

VEA: Bearish September Seasonality

Seeking Alpha

The Technical Take

Along with bearish seasonal tendencies right now, VEA’s technical situation is not as rosy as it was earlier in 2024. Notice in the chart below that shares are in a solid uptrend, highlighted by a rising long-term 200-day moving average. A series of higher highs and higher lows is likewise something we want to see. But the fund is now encroaching on its all-time highs from the middle of 2021.

It would be natural to expect some churning and a consolidation of price action around those old highs. Additionally, there is an uptrend resistance line right near where VEA settled at to close August – a pullback to the uptrend support line, currently near $47, would not disrupt the broader trend.

Also take a look at the RSI momentum oscillator at the top of the graph – it has been ranging in a wide zone, but never really reaching either overbought or oversold conditions.

Overall, VEA is trending up, but a pause in the uptrend would certainly make sense here.

VEA: Shares Rise Toward Resistance, Bullish Longer-Term Uptrend

StockCharts.com

The Bottom Line

I have a buy rating on VEA. I like the fund from a long-term perspective based on valuation and its diversification benefits, but acknowledge that seasonality is a risk while the technical situation points to a pause in the uptrend.