If Goldman Sachs is right, investors can position their portfolios accordingly with two Vanguard index funds.
Goldman Sachs recently updated its 10-year forecast for global equities. The S&P 500 (^GSPC +0.54%), a benchmark for the entire U.S. stock market, is projected to return 6.5% annually, below the global average of 7.7% annually. But equities in two regions are expected to outperform.
Goldman analysts led by Peter Oppenheimer expect Asian and emerging-market stocks to post annual returns of 10.3% and 10.9%, respectively, during the next decade as measured in local currency. The analysts also expect those local currencies to strengthen against U.S. dollars, such that annual returns total 12.6% and 12.8%, respectively, as measured in U.S. currency.
Investors can position their portfolios to benefit by owning shares of the Vanguard FTSE Pacific ETF (VPL +0.00%) and the Vanguard FTSE Emerging Markets ETF (VWO +0.35%). Read on to learn more.
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1. Vanguard FTSE Pacific ETF
The Vanguard FTSE Pacific ETF measures the performance of 2,300 companies located in Asia, especially Japan, Australia, and Korea. The index fund is most heavily weighted toward stocks in the financial, industrial, and consumer discretionary sectors. The top five holdings are listed by weight below:
- Samsung Electronics: 3.3%
- Toyota Motor: 2.1%
- Commonwealth Bank of Australia: 1.9%
- Mitsubishi Financial: 1.9%
- Sony: 1.8%
Importantly, while Goldman Sachs expects the Asian market to outperform U.S. stocks in the next decade, the opposite happened in the last decade. In fact, the S&P 500 achieved a total return of 288% over the last 10 years, while the Vanguard FTSE Pacific ETF returned 105%.
The Vanguard FTSE Pacific ETF has an expense ratio of 0.07%, meaning shareholders will pay $7 annually on every $10,000 invested in the index fund. That makes this index fund a cheap and easy way to get exposure to Asian equities, but I would keep a much larger percentage of my portfolio in an S&P 500 index fund — I’ll explain why in the last section.
2. Vanguard FTSE Emerging Markets ETF
The Vanguard FTSE Emerging Markets ETF measures the performance of about 6,000 companies located in emerging markets, especially China, Taiwan, and India. The fund is most heavily invested in stocks in the technology, financial, and consumer discretionary sectors. The top five positions are listed by weight below:
- Taiwan Semiconductor: 10.6%
- Tencent Holdings: 4.5%
- Alibaba Group: 3.4%
- HDFC Bank: 1.1%
- Reliance Industries: 1%
Here again, Goldman Sachs expects emerging-market stocks to outperform the U.S. market over the next decade, but the opposite occurred over the last decade. The S&P 500 achieved a total return of 288%, while the Vanguard FTSE Emerging Markets ETF returned just 106%.
The Vanguard FTSE Emerging Markets ETF has a modest expense ratio of 0.07%, meaning shareholders will pay $7 per year on every $10,000 invested in the fund. Once again, I would keep a much larger percentage of my portfolio in an S&P 500 index fund.
Vanguard International Equity Index Funds – Vanguard Ftse Emerging Markets ETF
Today’s Change
(0.35%) $0.19
Current Price
$54.30
Key Data Points
Market Cap
$0B
Day’s Range
$54.09 – $54.32
52wk Range
$39.53 – $56.04
Volume
4.4M
Avg Vol
0
Gross Margin
0.00%
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Investors should think twice before shying away from U.S. stocks in the next decade
While the Vanguard index funds discussed offer convenient exposure to stock markets in Asia and emerging markets, I would keep the vast majority of my portfolio in U.S. stocks (including an S&P 500 index fund). Not only has the S&P 500 consistently outperformed international equities over long periods, but Goldman Sachs has also been wrong in the past.
In 2015, Goldman strategist David Kostin said the S&P 500 would return 5% annually over the next decade, citing historically rich valuations as a headwind. But the index actually returned 12.9% annually. Goldman failed to consider that upward-trending profit margins would make investors more comfortable with higher valuations. Indeed, the S&P 500 more than doubled Goldman’s forecast return over the last decade.
The same thing could happen in the next 10 years as companies realize efficiencies from technological breakthroughs in artificial intelligence and robotics. So, while I think some exposure to Asian and emerging-market stocks is fine, I have far more confidence in U.S. stocks. As Warren Buffett once said, “Never bet against America.”
