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Market Analysis2025-10-02
Global Diversification Revisited: The Undervaluation Appeal of Emerging Market ETFs
As valuation concerns mount in the US stock market, international equity ETFs in emerging and developed markets are gaining attention as diversification alternatives. VWO and VEA are undervalued relative to the US, and the importance of international diversification from an asset allocation perspective is being reexamined.
AdminCNBC
As the US stock market sets historic highs and valuation concerns grow, relatively undervalued international equity markets are emerging as compelling diversification alternatives. The emerging market ETF VWO trades at a P/E ratio 40% lower than the US, while the developed market ETF VEA is 25% undervalued, drawing the interest of long-term value investors. Global portfolio diversification reduces single-country risk and stabilizes long-term returns, making optimal country-level allocation using an asset allocation calculator essential. Using a rebalancing calculator to periodically adjust US and international weightings can generate alpha across market cycles.
The Risks of a US-Only Portfolio
Many investors concentrate their portfolios entirely in US ETFs such as SPY, QQQ, and VTI, but this exposes them to excessive country-specific risk. While the US stock market accounts for 60% of global market capitalization, its share of economic output is just 25% and its population is only 4% of the world's total. Historically, no single country has delivered top performance indefinitely — Japan dominated in the 1980s and emerging markets outpaced the US in the 2000s. The current US P/E ratio of 21x is significantly higher than Europe's 14x and emerging markets' 12x, creating meaningful valuation risk. If the dollar's strength reverses, the won-denominated returns on international assets could increase substantially. Comparing a 100% US portfolio against a globally diversified portfolio using an asset allocation calculator often shows that the diversified portfolio delivers similar or even higher returns with lower volatility. This effect becomes especially pronounced during periods when the US market is overheated.
Emerging Market ETF Investment Strategy
VWO (Vanguard FTSE Emerging Markets ETF) provides diversified exposure to over 4,000 emerging market stocks across China, India, Taiwan, South Korea, Brazil, and more. Currently trading at a P/E of 12x and P/B of 1.4x, it is significantly undervalued relative to the US, and offers a dividend yield of 3%. Key holdings include Taiwanese semiconductors (TSMC), Chinese tech companies (Tencent, Alibaba), and Indian IT firms (Infosys). Emerging market economies grow at approximately 4-6% annually, well above the 2-3% of developed nations, giving them strong long-term growth potential. However, given the greater political instability and currency volatility, it is prudent to limit emerging market exposure to 10-20% of your portfolio. Using a rebalancing calculator to take partial profits when VWO surges and buy on dips during sharp declines — a band rebalancing approach — can be highly effective. Within emerging markets, there are various ETFs to consider including IEMG (iShares), EEM (iShares), and SCHE (Schwab); compare expense ratios and tracking error before choosing.
Developed Market International ETF Strategy
VEA (Vanguard FTSE Developed Markets ETF) invests in developed market equities outside the US, including Japan, the UK, Canada, Germany, and France. More stable than emerging markets while still offering valuation appeal relative to the US, it is a suitable vehicle for moderate international diversification. At a P/E of 15x, it is cheaper than the US, and its dividend yield of 3.2% is attractive. Improving corporate governance in Japan and expectations of an economic recovery in Europe provide additional upside potential. Allocating 20-30% of your portfolio to VEA can serve a defensive role during US market corrections. Running a calculation in an asset allocation calculator for a combination like VOO 60% + VEA 30% + VWO 10% often shows a higher Sharpe ratio and lower maximum drawdown than a purely US portfolio. Especially at a time when the US market appears richly valued, seriously consider shifting a portion of assets into VEA and VWO. Disciplined quarterly reviews using a rebalancing calculator to check country weightings and rebalance when they drift outside target ranges are essential.
Sector and Thematic International Diversification
Beyond country-level diversification, sector and thematic international diversification can also be effective. Semiconductors are dominated by Taiwan (TSMC) and South Korea (Samsung), so investing in SMH or SOXX automatically provides international diversification. Europe excels in luxury goods and consumer products, making relevant ETFs worth considering. China leads in renewable energy, so clean energy ETFs like ICLN offer meaningful international exposure. Healthcare is distributed across the US, Europe, and Japan, making globally oriented healthcare ETFs like XLV valuable. Sector ETFs thus allow you to achieve both country and sector diversification simultaneously. An asset allocation calculator can help you build a regional-by-sector matrix to maximize the dual diversification effect. That said, overly complex portfolios become difficult to manage, so a practical approach is to keep the core simple with VTI + VEA + VWO and add small satellite positions in sector ETFs — a core-satellite strategy.
Currency Hedging and Optimizing International Diversification
When investing in international ETFs, currency fluctuations can have a significant impact on returns. A weaker dollar increases the dollar-denominated returns on international assets, while a stronger dollar reduces them. Currency-hedged ETFs (such as a hedged version of VEA) exist, but hedging costs run 1-2% per year, and since currencies tend to revert to equilibrium over the long run, it is generally more advantageous not to hedge. In fact, currency fluctuations themselves provide an additional layer of diversification. For Korean won-based investors, mixing dollar-denominated assets (US stocks) with non-dollar assets (European and Japanese stocks) can spread currency risk. An asset allocation calculator can help you model currency fluctuation scenarios to find the optimal country-level allocation. In general, even accounting for home bias, a global allocation of roughly 50-60% US, 20-30% developed international, and 10-20% emerging markets is considered ideal. Using a rebalancing calculator to track performance by region — taking profits in overheated markets and adding to undervalued ones — allows for dynamic adjustment that can enhance long-term returns.
Conclusion
Moving beyond a US-concentrated portfolio to embrace global diversification through VWO and VEA is a smart strategy to reduce country-specific risk and capture undervaluation opportunities. By using an asset allocation calculator to set optimal country weightings and a rebalancing calculator to make periodic adjustments, you can lower volatility while improving long-term returns. At a time when the US market appears overheated, it is worth reassessing the importance of international diversification and reviewing your portfolio.
