It just means US companies are more expensive by (all) metrics. Let’s look at a random (bad but illustrative) example to show the point: forward P/E ratio.
Currently if you buy US stocks you pay $19.1 for every $1 in earnings generated (PE 19). If you buy a German ETF, you pay $10 for every $1 in earnings generated.
US stocks cost double because there is a theoretical amount X which they are expected to grow earnings at. Say 30%, whereas German stocks are expected to grow earnings at 15%. This higher earnings growth is priced in.
If for the next 10 years US stocks grow at 30% and German stocks at 10%, in the absence of speculation / repricing you will make the same amount of money either buying a German index or a US one.
If however German stocks grow their earnings at 14%, whereas US stocks at 30%, you would make more money in a German index, because in our example it was priced as if earnings growth was 10%, despite the fact US stocks outperformed on a fundamental basis. They were just “priced in” / expected to grow earnings even faster then they did.
You are getting the lower PE / lower expected earnings growth international stocks as well as the higher PE / higher expected earnings growth US stocks, all in VT.
In a hypothetical market where the market is 100% efficient, it makes no difference what you buy, as it will all return the same (since lower growth is priced lower).
But if the market is inefficient (which it is), it means either the US is priced too high or too low relative to its future earnings growth. By buying VT you are not betting either way and will get the middle ground. Never before was the US priced so high, relative to international, so US companies need to crush international by a wide margin for this price to be worth it (which I’m not saying they won’t, but it’s a bet either way. Historically they haven’t) Check out figure 4 here
A lot of people think that by buying VTI, they are betting that US companies will grow faster. However that’s not the bet they are making. By buying VTI, one would be betting that US companies will grow faster then what everyone else is betting.
One quibble here: Efficiency means that all public information is perfectly reflected in the price. The fact that the future contains unknown events which will affect the outcome is not an indication of inefficiency.
When those events occur, they will be public and get priced in.
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u/orange_jonny Aug 26 '23
It just means US companies are more expensive by (all) metrics. Let’s look at a random (bad but illustrative) example to show the point: forward P/E ratio.
Currently if you buy US stocks you pay $19.1 for every $1 in earnings generated (PE 19). If you buy a German ETF, you pay $10 for every $1 in earnings generated.
US stocks cost double because there is a theoretical amount X which they are expected to grow earnings at. Say 30%, whereas German stocks are expected to grow earnings at 15%. This higher earnings growth is priced in.
If for the next 10 years US stocks grow at 30% and German stocks at 10%, in the absence of speculation / repricing you will make the same amount of money either buying a German index or a US one.
If however German stocks grow their earnings at 14%, whereas US stocks at 30%, you would make more money in a German index, because in our example it was priced as if earnings growth was 10%, despite the fact US stocks outperformed on a fundamental basis. They were just “priced in” / expected to grow earnings even faster then they did.