Is This Simple Index Fund a Millionaire Maker?

Are you considering investing overseas to grow your wealth? The Vanguard FTSE Developed Markets Index Fund offers both opportunities and challenges for potential investors.

The Vanguard S&P 500 ETF (VOO 0.26%) is a well-known exchange-traded fund (ETF) renowned for its size and popularity. This fund tracks the S&P 500 market index with great accuracy and very low fees. If you are new to investing, this Vanguard ETF might be the only option you need. Matching average market returns over a long period can be a solid strategy.

But perhaps you want to explore further. Could the Vanguard FTSE Developed Markets Index Fund (VEA -0.23%) present a more valuable long-term opportunity? This fund could be seen as undervalued compared to its S&P 500-tracking counterpart. Might the Developed Markets ETF provide a better chance of helping you achieve a million dollars, given its recent lower performance?

Understanding the Vanguard Developed Markets Fund

To start, the Developed Markets fund is one of the top 10 ETFs currently on the market, boasting $146.6 billion in assets under management (AUM).

This passively managed index fund comes with an impressively low annual fee, identical to that of the Vanguard S&P 500 fund at just 0.03%. Vanguard has a reputation for advocating low costs and encouraging investors to hold their investments for the long term.

The ETF tracks a market index that comprises approximately 3,100 stocks situated in developed markets outside of the United States. At present, 55% of its AUM is allocated to European stocks, followed by 35% invested in the Asia-Pacific region and 10% in Canada. Significant country investments include Japan (21%), the U.K. (13%), Canada (10%), and France (9%). This fund attracts investors looking for exposure to robust international markets, particularly in Japan and Western Europe.

Notable stock holdings consist of major companies like German software leader SAP (SAP -1.04%), Dutch chip manufacturing expert ASML Holdings (ASML -0.56%), and the Danish pharmaceutical giant Novo Nordisk (NVO -1.30%). Each of these top five stocks contributes roughly 1% to the overall value of the fund, demonstrating a broad diversification compared to the S&P 500, where companies like Apple (AAPL 1.06%) and Microsoft (MSFT 0.57%) have much weightier impacts.

The ETF has provided dividend-like distributions of $1.61 per share over the past year, translating to an attractive yield of 3.1%, significantly higher than the S&P 500 fund's yield of 1.4% over the same timeframe.

Comparing with the S&P 500

Historically, this fund has underperformed the S&P 500.

There are specific instances when the Developed Markets fund may have fared better, usually during downturns in the American economy. For example, it saw stronger returns during the 2008 financial crisis triggered by the mortgage meltdown.

However, such opportunities are rare. If one looks solely at price changes rather than total returns, the international fund's advantage diminishes significantly. These dividend payments can indeed make a considerable difference.

To give you a clearer picture, since the fund's launch in July 2007, here’s a summary of its performance against the S&P 500:

Is the Developed Markets ETF a Path to Millionaire Status?

Purchasing shares in the Developed Markets ETF might be appealing if you believe the American market is overvalued and poised for a downturn. If these predictions hold true, this international fund could potentially outperform an all-American investment like the Vanguard S&P 500 ETF temporarily.

This fund might also be more attractive to income-oriented investors, thanks to its generous 3.1% yield. For those who prioritize consistent income over capital appreciation, this ETF offers a solid option.

Nonetheless, in most scenarios, investing in the Developed Markets ETF is a bold wager on the notion that American businesses will lag behind their global counterparts over time. Historically, this hasn’t been the case. While the fund provides diversification and dividend income, it doesn’t seem to indicate strong long-term performance when viewed independently.

You could indeed reach a million with this fund, but it would require a substantial initial investment and a longer holding period compared to an S&P 500 index fund. Therefore, while it can serve as a useful component in your investment strategy, it may not serve as the foundation of a robust wealth-building plan.

Investment, ETF, Vanguard