Can a Regular Index Fund Generate Millionaire Status?
Kickin' It with the Biggest ETFs: Vanguard S&P 500 vs. Vanguard Developed Markets
The Vanguard S&P 500 ETF (VOO) and the Vanguard Developed Markets ETF (VEA) are two of the biggest players in the ETF market. They're like the rock stars of the financial world, drawing in countless investors with their lauded performances and minimal fees.
The VOO ETF is famous for tracking the S&P 500 market index with remarkable precision, making it a go-to choice for those new to the investment game. If you're yet to dip your toes into the stock market, this bad boy might be all you need. After all, who doesn't love matching the average market returns over a long holding period?
But maybe you're the type that craves a little more adventure. In that case, the VEA ETF might be your cup of tea. With a lower profile and a focus on developed markets outside the U.S., it could offer a unique blend of underappreciated potential and, at times, undervalued status compared to its S&P 500-tracking cousin. Could it be the key to striking it rich?
BEHIND THE CURTAIN: WHY VEA ROCKS
First things first: the VEA ETF is another top 10 player on the ETF scene, managing a whopping $146.6 billion in assets.
This passive index fund boasts Vanguard's signature low annual fees, joining forces with the VOO's expense ratio of 0.03% per year. This airtight cost structure is a hallmark of the Vanguard fund management style, an homage to the company's founder, Jack Bogle, and his focus on low fees and long holding periods.
Now, let's talk about the goodies this ETF has to offer. The VEA tracks a market index with approximately 3,100 stocks, all hailing from developed markets beyond the borders of the good ol' USA. A whopping 55% of its assets are currently invested in European stocks, followed by 35% in the Asia-Pacific region, and 10% in Canada. Countries like Japan (21%), the U.K. (13%), Canada (10%), and France (9%) are front and center in this fund, making it a bet on the international stage, particularly industrialized regions like Japan and Western Europe.
When it comes to specific stock holdings, German software giant SAP (SAP), Dutch chip-making equipment designer ASML Holdings (ASML), and Danish pharmaceutical veteran Novo Nordisk (NVO) take the top spots. Each of the five largest positions represents about 1% of the fund's total value, giving us a much broader diversification than we find in the S&P 500, where top stocks like Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) each hold more than 5% of the overall fund value.
Lastly, the VEA paid out dividend-like distributions of $1.61 per share over the last year, which translates to an effective yield of a generous 3.1%. That's a significant boost compared to the S&P 500's 1.4% yield on the same basis.
VEA VS. VOO: WHO WINS THE DANCE-OFF?
The VEA fund has lagged behind the S&P 500 for much of its history. However, during specific periods of weakness in the American economy, the international fund has shone like a beacon, outperforming the S&P 500 during the all-too-familiar Lehman mortgage bankruptcy and subprime mortgage meltdown of 2008.
But finding those opportunities has required a fine-toothed comb, and the international advantage vanishes almost entirely when we compare simple price changes rather than total returns that take dividends into account. Those payouts make a huge difference, my friend.
Here's a breakdown of the VEA's performance compared to the S&P 500 since the fund's launch in July 2007:
VEA Total Return Level data by YCharts
WILL THE VANGUARD DEVELOPED MARKETS ETF MAKE YOU A MILLIONAIRE?
If you're willing to take a gamble that the American economy is both overpriced and on the verge of a cataclysmic collapse, the international fund could outperform its all-American counterpart for a spell. Indeed, if both assumptions hold true, you're looking at green for the greenback-weakened international fund.
If, on the other hand, you're an income investor who doesn't sweat the stock price gains and just loves those sweet, sweet dividends, the VEA ETF might be just your cup of tea. With a beefy 3.1% yield, it's hard to argue with that.
But in most cases, investing in the Developed Markets ETF is just a gutsy wager that the U.S. economy will underperform the rest of the developed world in the long run. Over the past century or so, this hasn't exactly been the trend. This fund can provide diversification and dividend checks for your portfolio, but it doesn't look like a powerhouse long-term performer on its own.
You can make a million by investing in this weaker fund, but you'd need to start with a substantial initial investment and/or be prepared to hang on for several decades longer than you would with an S&P 500 index fund. This baby could be a short-term tool, but it's not an obvious cornerstone of a wealth-building nest egg.
- In certain periods where the American economy experiences weakness, the Vanguard Developed Markets ETF (VEA) has outperformed the Vanguard S&P 500 ETF (VOO), as demonstrated during the Lehman mortgage bankruptcy and subprime mortgage meltdown of 2008.
- The VEA ETF, like its S&P 500-tracking counterpart, is managed by Vanguard with low annual fees, currently at 0.03% per year, providing a cost-effective investment strategy for those seeking minimal expenses.
- During specific periods, the Vanguard Developed Markets ETF could potentially underperform the Vanguard S&P 500 ETF. This underperformance might be tempting for investors seeking an opportunity to strike it rich, but it's important to consider the fund's long-term performance and potential for dividend returns when making investment decisions.
- The VEA ETF focuses on developed markets outside the United States, offering investors a broader diversification of stocks, with a substantial portion invested in European (55%) and Asia-Pacific (35%) markets, as well as Canada (10%). The fund's top holdings include German software giant SAP, Dutch chip-making equipment designer ASML Holdings, and Danish pharmaceutical veteran Novo Nordisk.
