Exploring the Potential of the Vanguard Developed Markets Fund

Are you considering expanding your investment horizons beyond American markets to grow your wealth? The Vanguard Developed Markets Index Fund presents a blend of opportunities and obstacles for investors looking to diversify.

The Vanguard S&P 500 ETF (VOO 0.26%) is one of the largest and most extensively traded exchange-traded funds (ETFs) available, as it tracks the performance of the S&P 500 (^GSPC 0.32%) market index with low fees and remarkable accuracy. This ETF could be the ideal investment choice for those making their first foray into stocks or funds, as simply replicating average market returns can be a valid strategy over a long investment horizon.

Alternatively, if you’re seeking to construct your portfolio from a more opportunistic standpoint, you might be curious about the potential of the Vanguard FTSE Developed Markets Index Fund (VEA -0.23%). This fund may appear more appealing for long-term growth, especially considering its lower valuations compared to the S&P 500. In essence, could the Developed Markets ETF actually offer a greater chance at yielding millionaire-making returns, given its slower growth in recent years?

Understanding the Vanguard Developed Markets Fund

To start, the Developed Markets fund ranks among the top 10 ETFs in the market, boasting an impressive $146.6 billion in assets under management (AUM).

This index fund is passively managed and features exceedingly low annual fees, matching the Vanguard S&P 500 fund’s expense ratio of 0.03% per year. Low fees and long-term investment are fundamental to Vanguard’s philosophy, established by its founder, Jack Bogle.

Tracking a market index consisting of approximately 3,100 stocks from developed markets outside the U.S., the fund has 55% of its AUM invested in European stocks, 35% in the Asia-Pacific region, and 10% in Canada. Significant country allocations include Japan (21%), the U.K. (13%), Canada (10%), and France (9%). This fund essentially represents a bet on the potential of international markets, particularly in advanced industrial countries like Japan and Western Europe.

Key stock holdings include major companies such as SAP (SAP -1.04%), ASML Holdings (ASML -0.56%), and Novo Nordisk (NVO -1.30%). Each of these top positions represents about 1% of the total fund’s value. This level of diversification is much broader than that seen in the S&P 500, where leading stocks like Apple (AAPL 1.06%), Nvidia (NVDA 1.26%), and Microsoft (MSFT 0.57%) each account for over 5% of the fund value. While both ETFs follow a market-weighting strategy, the Developed Markets fund isn’t reliant on a small number of massive companies.

Moreover, the ETF has provided dividend-like distributions of $1.61 per share in the past year, translating into a yield of 3.1%. This is notably more generous compared to the S&P 500 fund’s yield of around 1.4%.

Comparing This ETF with the S&P 500

Historically, this international fund has struggled to match the S&P 500’s performance.

Though it is possible to identify certain economic downturns in the U.S. that could create short-term advantages for this fund, its long-term performance remains less impressive. For instance, while it outperformed during the financial crisis from the Lehman bankruptcy and subsequent subprime mortgage meltdown in 2008, finding such isolated periods proves rare. Furthermore, the advantage vanishes when looking at simple price changes instead of total returns, which take dividends into account.

Since its launch in July 2007, the ETF’s historical performance compared to the S&P 500 shows a consistent pattern of underperformance. Analyzing total return levels in detail can reveal contrasting insights.

Is the Developed Markets ETF a Path to Wealth?

If you believe the American economy is significantly overvalued and on a downward trend, it may be wise to consider investing in the Developed Markets fund. Should these assumptions prove accurate, this international fund could outperform the Vanguard S&P 500 ETF for some time.

Additionally, the fund’s solid quarterly payouts and appealing 3.1% yield could attract income-focused investors who prioritize regular income over capital gains.

That said, investing in the Developed Markets ETF essentially amounts to a calculated risk that American companies will underperform compared to their global peers in the long term—a trend not observed over the past century. While this alternative fund can introduce diversification and reliable dividends to your portfolio, it does not appear to be a sustainable long-term growth investment by itself.

You could potentially wait decades and make a million dollars with this underperforming fund, but such an outcome would require a significantly larger initial investment—or an extended holding period compared to a more established fund like the S&P 500 index fund. Therefore, while a useful short-term option, the Developed Markets ETF is not the most obvious building block for a wealth-accumulating strategy.

fund, investment, markets