VEA: Break in Uptrend Expected, But Developed Markets Remain Cheap (NYSEARCA:VEA)

The Vanguard FTSE Developed Markets Index Fund ETF (NYSEARCA: VEA) has been a serial performer compared to US stocks. It has to do primarily with the sectoral structure of the two sections of the global stock market. The ex-US developed market has much more exposure to cyclical areas such as financials, industrials, materials and energy. Information technology makes up more than 30% of the S&P 500, but only 11% of VEA. Of course, as tech has outperformed all other sectors since the October 2022 bear market low, the S&P 500 beat the VEA.

But one factor that also has key implications for ETFs compared to US stocks is the US Dollar Index (DXY). The greenback is flat on the year after a strong start to 2024. This has been a tailwind for VEA relatively, but the fund has not seen a ton of alpha in the last few months. That’s because Magnificent Seven US stocks continue to gain, while the VEA Diversified ETF has seen more measured progress.

I REITERATES a buy rating on VEA based on valuation, but I will note possible resistance on the chart and the seasonal bearish trends that often occur in September. The stock is up 6% total return from my previous analysis.

S&P 500 rebounds from October 2022 low: Technology leads

The US dollar index is stable in 2024

right issuerVEA seeks to track the investment performance of the FTSE Developed All Cap ex US index. The ETF provides a convenient way to match the performance of a diversified group of stocks of large, medium and small companies located in Canada and major markets in Europe and the Pacific region. VEA follows a passively managed full replication approach.

VEA has increased significantly since the fund’s last review in the first quarter. Total assets under management are now $198 billion, up from $184 billion in March. Its annual expense report remains very low at only 0.06% while VEA forward dividend yield is more than twice the S&P 500 ETF (SPY) at 3.18% as of August 30, 2024.

Stock price timing improved from the start of the year as the ETF nears an all-time high. Risk assessments they are also healthy given portfolio diversification and somewhat mild annual volatility values. finally, liquidity is robust as average daily volume is high at over eight million shares and the 30-day average bid/ask spread is tight at two basis points, on Vanguard.

In terms of the portfolio, Morningstar’s 4-star silver-rated ETF sits along the top row of the style box, but there is a material 21% exposure to foreign SMID limits, so there is a some cyclical access in this sense.

What’s particularly attractive about VEA today is that the price-to-earnings ratio is very low at 14.1 – nearly seven times cheaper than the S&P 500. With long-term EPS growth of more than 10%, the resulting PEG ratio it’s just 1.4 – a solid deal even after an 11% year-to-date. total return by August.

VEA: Portfolio and Factor Profiles

VEA is also much more diversified than the S&P 500. Finance is the largest weighting, but it is only 20%. Furthermore, the largest single stock is Novo Nordisk ( NVO ), but it only represents 1.7% of the fund. Thus, unlike the Mag 7, it’s unusual to see a handful of individual stocks driving the overall performance of the ETF, which I like to see from a long-term investment perspective.

Dividend investors should also appreciate the allocation, as a higher weighting in higher-yielding areas means higher annual dividend payments than U.S. stocks.

VEA: Information on holdings and dividends

Where we face risks is with seasonality. September is VEA’s worst month when scanning the last 10 years of return history. Average performance fell by about 3%, with VEA declining in each of the past four Septembers.

The good news is that October and November were positive months, but short-term volatility should be expected.

VEA: The seasonality of September baj

Technical takeover

Along with seasonal downtrends right now, VEA’s technical situation is not as good as it was at the start of 2024. Notice in the chart below that the stock is in a solid uptrend, highlighted by a 200 moving average of long-term growing days. A series of higher highs and higher lows is also something we want to see. But the fund is now hitting all-time highs since mid-2021.

It would be natural to expect price action to fluctuate and consolidate around those old highs. Additionally, there is an uptrend resistance line right near where VEA settled to close August – a pullback to the uptrend support line, currently near $47, would not disrupt the broader trend.

Also, take a look at the RSI momentum oscillator at the top of the chart – it fluctuated over a wide range but never reached overbought or oversold conditions.

Overall, VEA is up, but a break in the uptrend would certainly make sense here.

VEA: Stocks rise to resistance, long-term uptrend

conclusion

I have a buy rating on VEA. I like the fund from a long-term perspective based on its valuation and diversification benefits, but recognize that seasonality is a risk, while the technicals point to a break in the uptrend.