Some Wall Street Analysts Are Expecting an S&P 500 Correction, So This Vanguard Index Fund Is A Smart Buy Right Now

that much S&P 500 Stronger-than-expected U.S. economic growth has led to a 27% rise over the past year and expectations the Federal Reserve will soon move to cutting interest rates. Enthusiasm for artificial intelligence (AI) also led to an upward trend in the U.S. stock market.

However, some analysts expect the S&P 500 to undergo a correction in 2024, meaning they expect the index to fall at least 10% from its peak. JP Morgan Chase The index’s year-end target is 4,200, which would represent a 17% decline from the current level of 5,070. Morgan StanleyA target of 4,500 would mean a decline of 11%.

To be clear, not all Wall Street analysts are predicting the index will fall. for example, Goldman Sachs The year-end target was recently raised to 5,200, which means an upside of about 3%. However, some analysts are pessimistic as the S&P 500 is currently trading at 20.4 times forward earnings, well above its 10-year average of 17.7 times.

“The valuation of non-U.S. stocks relative to the S&P 500 is at a 20-year low,” Lisa Shalett, chief investment officer at Morgan Stanley, recently wrote. So now is a great time to diversify your portfolio with exchange-traded funds (ETFs) that focus on non-US stocks.

Vanguard Total International Stock ETF

that much Vanguard Total International Stock ETF (VXUS 1.14%) It holds stocks of more than 8,500 foreign companies. This includes value and growth stocks from all developed and emerging markets around the world, excluding the United States.

The fund has the largest allocation to European equities (40.6%), followed by Asia Pacific equities (27.1%) and emerging market equities (24.7%). North American stocks (7.1%) and Middle Eastern stocks (0.4%) make up the remainder. The ETF’s top 10 holdings are as follows:

1. Taiwan Semiconductor Manufacturing: 1.6%
2. Novo Nordisk: 1.2%
3. ASML: 1.2%
4. nestle: One%
5. samsung: 0.9%
6. Toyota cars: 0.8%
7. Tencent Holdings: 0.7%
8. Novartis: 0.7%
9. LVMH Moët Hennessy Louis Vuitton: 0.7%
10. husks: 0.7%

The Vanguard Total International Stock ETF has delivered a total return of 52% over the past 10 years, with an average annual growth rate of 4.3%. This significantly underperforms the S&P 500, which posted a 230% return on an average annual growth rate of 12.7%. However, with the exception of cryptocurrencies, no major asset class has outperformed the S&P 500 over the past decade.

I have previously suggested that investors avoid mutual funds and ETFs that have consistently underperformed their benchmark indices over long periods of time. S&P 500 index funds are such a cheap and easy investment option that it makes little sense to settle for anything else. However, I will make an exception in this case for two reasons.

First, recent research has shown that portfolios that mix foreign and domestic stocks tend to perform better than portfolios limited to domestic stocks over a normal lifetime. In fact, the average return of a mixed stock portfolio exceeds the average return of a domestic stock portfolio on three metrics: assets at retirement, income at retirement, and assets at death.

Second, the current high valuation of the S&P 500 makes a compelling case to invest money in foreign stocks right now. The Vanguard Total International Stock ETF is an affordable and cost-effective way to achieve that goal. The expense ratio is only 0.08%. That means the annual fee for a $10,000 portfolio is $8.

How Investors Should Think About Asset Allocation

History shows that investors should place most of their money in U.S. stocks. The S&P 500 has returned an average of 10.3% per year over the past 30 years. It has also outperformed virtually every major asset class over the past five, 10, and 20 years. This includes stocks from Europe, Asia and emerging markets, as well as international bonds and precious metals.

However, the S&P 500 is currently trading at a premium to its average forward earnings multiple over the past 10 years. This means that many U.S. stocks may be overvalued, which could cause the S&P 500 to fall sharply. Nonetheless, at its current valuation, the Vanguard International Stock ETF has a reasonable chance of outperforming the S&P 500 index fund over the next three to five years.