I’m penning this article the evening of October 11, 2018. The market has just completed two of the most severe convulsions since early-February, when the Dow suffered a 600-point decline followed by two 1,000-point declines over a span of 4 trading days.
Over the past two days, the Dow has dropped 1,377 points, the Nasdaq 409 points, and the S&P 500 some 152 points, declines of 5.21%, 5.29%, and 5.28%, respectively. When you look at those 3 averages, you quickly sense that the decline was widespread.
Clearly, if one is looking to pick up some bargains, one could look to snap up any one of a number of ETFs. A good total-market ETF, for example, might not be a bad bet. Might you, though, be able to do even better than that? Might there be options that, viewed over the course of 2018 as a whole, present even better bargains?
I spent a little time looking at that question, and have come up with 3 ETFs I’d like to propose for your consideration. Here they are.
- Vanguard FTSE All-World ex-US ETF (VEU)
- Vanguard Consumer Staples ETF (VDC)
- Vanguard Real Estate ETF (VNQ)
First, here’s a quick peek at what our 3 candidates did over the past couple of days. You’ll notice a slight divergence. VEU slumped fairly consistently both days. VDC and VNQ held up decently on Day 1 of the decline, but then got hit hard on Day 2. Long story short, however, they fell hard just like pretty much everything else.
Next, though, let’s step back and take a look at how the 3 ETFs have performed year-to-date. In this graphic, I’ve overlaid the S&P 500 average to put things in perspective.
The action in the S&P 500 is pretty dramatic. In two days, the average dropped from a YTD return of almost 7.5% to 2.05%. However, this is still between roughly 9% and 13% better than VEU, VDC, and VNQ.
One by one, let’s take a quick look at each of these 3 ETFs. I’ll briefly consider how each got to the point it is today, a little about the ETF itself, and the possibilities moving forward.
Vanguard Consumer Staples ETF
As you can quickly gather from its name, VDC focuses on the consumer staples sector. As it turns out, this sector is particularly helpful in protecting your portfolio in the event of a market downturn. In brief, Consumer Staples is the term given to products, and the companies which produce these, that are considered essential, such as food, beverages, household items, and tobacco. These are the sorts of items that people need to function each and every day, and therefore, are generally unable to cut out of their budget even in bad times.
Take a look at VDC’s Top-10 holdings.
Source: VDC Profile Page
Just the other evening, I went to my local Costco (COST) and, among other items, picked up a multi-pack of Crest toothpaste, a Proctor & Gamble (PG) product. My neighbor is a huge Diet Coke fan, and I see empty cartons from cases of this Coca-Cola (KO) product in his garbage on a regular basis. Lastly, I recently got a great price on a few pairs of jeans at Walmart (WMT). And I am far from alone.
Why, then, have consumer staples stocks struggled in 2018? Analysts suggest several factors. Established companies are facing competition from smaller, nimbler upstarts. Energy costs are rising. Finally, ongoing trade wars may not be doing this segment any favors.
It may prove folly, however, to discount these established companies. Think, for example, about Coca-Cola’s massive and efficient distribution network. Think about things such as economies of scale. Lagging the overall S&P 500 by some 9% this year, this segment may deserve a second look.
VDC contains 93 stocks, and has Assets Under Management (AUM) of $4.6 billion. It carries an expense ratio of .10% and sports an SEC yield of 2.85% as of 9/30/18.
Vanguard Real Estate ETF
When I first featured VNQ in a comparison of 3 REIT ETFs, the name of the ETF was Vanguard REIT Index ETF. A REIT is a corporate entity that invests in real estate. You might be surprised to discover that much of the real estate you see as you move about your daily life is owned by REITs. This can include everything from downtown Manhattan office buildings to suburban outlet malls to high-quality apartment complexes to mobile home parks.
What makes REITs somewhat unique from other entities that might invest in real estate as part of their business is their tax status. To qualify as a REIT, a company must agree to distribute at least 90% of its earnings to its investors in the form of dividends. As a practical matter, many REITs distribute 100% of their income to investors such that they owe no corporate tax.
The change to its present name was no accident. Beginning in late-2017, Vanguard gradually transitioned the index tracked by this ETF to the MSCI US Investable Market Real Estate 25/50 Index. According to a statement from Vanguard, the sector “includes real estate management and development companies in addition to real estate investment trusts (REITs).”
So, for example, VNQ now counts American Tower Corporation (AMT) as one of its Top-10 holdings. As you might have guessed from the name, among other things American Tower owns and/or operates some 40,000 cellular towers in the United States.
Here’s a look at VNQ’s sector breakdown:
Source: VNQ Profile Page
Not surprisingly, since REITs tend to hold large amounts of debt, they are very interest-rate sensitive. In the current environment, this forms a large part of their relative underperformance. At the same time, they offer stability and, by their very charter, a solid stream of dividend income. VNQ’s yield currently stands at approximately 3.29%.
VNQ currently has AUM of some $33.0 billion and carries an expense ratio of .12%.
Vanguard FTSE All-World ex-US ETF
VEU is a venerable ETF in the international total-market asset class. With an inception date of 3/2/07 and AUM of $22.9 billion, it stands head and shoulders above the competition. No wonder it carries an enviable (for a foreign ETF) .02% average spread to go along with its competitive .11% expense ratio.
VEU tracks the FTSE All-World ex-US Index. This index focuses on large-cap and medium-cap companies outside the U.S., but shies away from small-cap companies. Its fact sheet lists the index as having 2,712 constituents covering 46 different countries, in both developed and emerging markets.
Here’s a quick peek at VEU’s Top 10 holdings.
Source: VEU Profile Page
To give you some small sense of the sorts of companies that constitute the largest portions of the fund, here are extremely brief synopses of two of these companies, Nestle SA (OTCPK:NSRGY) and Novartis AG (NYSE:NVS):
- Nestle SA – Nestle is the largest food company in the world, measured by revenues. Encompassing baby food, bottled water, coffee & tea, dairy products, frozen food, pet food, snacks and more. The list of brands is made up of legendary names that you will instantly recognize, and Wikipedia states that 29 of these brands each have annual sales of over $1 billion. The company operates in 189 countries.
- Novartis AG – Novartis is the 6th-largest largest pharmaceutical company in the world, measured by revenues. According to its latest annual report, its R&D group received 16 major approvals, made 16 major submissions, and received six breakthrough therapy designations from the US Food and Drug Administration (FDA). Novartis’ products are available in more than 155 countries worldwide.
In a recent article on emerging markets, I briefly outlined some of the reasons for the underperformance of this asset class compared to the U.S. market. Developed international markets have also not been exempt from many of these factors, hence the roughly 13% YTD underperformance of VEU as compared to the S&P 500.
Summary and Conclusion
By the time you read this article, Friday’s market session will have likely come and gone. While, based on activity in futures, the expectation is that there will be a positive bounce, we’ll just have to wait and see.
However, I can all but promise that the YTD underperformance of these 3 ETFs will not be remedied in any one day. If you have been dutifully stashing some extra cash away, here are three possible places you can put some of it to work.
Bonus: A Peek Into ETF Monkey’s Personal Portfolio
In late 2016, after writing for Seeking Alpha for a little over a year, I for the first time offered readers a peek into my personal portfolio. It had been awhile since I had updated this, and a few things have changed. On my personal blog, I recently posted an update as of September 30, 2018. If you’re curious to see how I have allocated my own money, you’re welcome to take a peek!
Disclosure: I am/we are long VEU, VNQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.