One of the biggest themes playing out in stocks this year is the redemption story being penned by international equities, in both developed and emerging markets.
The MSCI EAFE Index, which focuses on non-U.S. developed economies, is higher by 28.7% year to date as of Oct. 28. This indicates that the gauge is on pace to outperform the S&P 500 for just the second time since 2019. The other occasion was 2022, when the EAFE benchmark merely performed less poorly than its U.S. counterpart. So it's understandable that investors may need some cajoling when it comes to non-U.S. equities and exchange-traded funds (ETFs).
Fear not, because those catalysts are in place -- and they're among the reasons why the Vanguard FTSE Developed Markets ETF (VEA 0.02%) is on my 2026 buy list.
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This ETF is just getting started
Skeptics may look at this international ETF and see that it's up 31.2% year to date, outpacing the MSCI EAFE and S&P 500 indexes, and think they've missed out on the biggest or easiest gains. That's not necessarily the case.
This Vanguard ETF has some attractive qualities, including a 21.1% weight to Japanese stocks -- the fund's largest geographic exposure. Not only are stocks in the Land of the Rising Sun being gobbled up by some famous American investors, the equity market rally there is underpinned by the ascent of Sanae Takaichi as the first elected female leader of Japan. Her election is an interesting historical footnote, to be sure, but there's more to the story.
Takaichi and the ruling Liberal Democratic Party (LDP) are expected to move forward with pro-market policies, including corporate reform, increased defense and infrastructure spending, and higher domestic investment -- all of which could bolster the case for Japanese stocks.
NYSEMKT: VEA
Key Data Points
Europe is another source of my enthusiasm for this Vanguard ETF. After what felt like an eternity in the doghouse relative to U.S. stocks, European stocks, which account for more than half the fund's roster, are on the mend. That's a good thing, but investors need to know why that's material in evaluating this ETF.
Put simply, Europe's renewed commitment to defense spending is one of the catalysts behind equity markets' rebound there. That's pertinent in discussing this Vanguard ETF, because it's levered to that theme by way of a 19.2% weight to industrial stocks -- its second-biggest sector exposure. Of note to investors considering the fund as a long-term core holding is the point that some European nations are pledging to devote 5% of their respective gross domestic products (GDPs) to defense spending.
That will result in some large numbers that take time to arrive at, potentially signaling that some of the industrial stocks residing in this Vanguard fund are primed for several years of upside.
Benefits galore with this Vanguard ETF
This ETF offers investors other perks. As an international fund, it provides diversification for U.S.-heavy portfolios, but the product itself is diversified. The ETF holds nearly 3,900 stocks, none of which command a weight of more than 1.4%. That's something to consider at a time when so many domestic cap-weighted funds are highly concentrated in a small number of stocks.
The international fund also keeps with the issuer's tradition of rock-bottom ETF expense ratios. The cost of admission for the aforementioned perks is just 0.03% annually, or $3 on a $10,000 investment. That's a good deal, and one resulting in significant cost savings for long-term investors.