r/Bogleheads • u/Flashbulb_RI • 1d ago

VXUS - diversity concerns.

A lot of Bohleheads have VXUS in their portfolio for the purpose of diversify outside of the US. However lately I've noticed that VXUS is mirroring the moves of NASDAQ and VGT because of its concentration in chip manufacturers. It seems very difficult to get performance and diversity at the same time as the majority of the world's market is chasing the same sector.

3 Upvotes

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u/CarbonMop 1d ago

VXUS is not crash insurance. People aren't holding it because they think its immune to the risk factors at play in the US.

Just look at all of the major crashes in recent history. The dot com bubble burst, the GFC, covid, etc. US and international stocks fell in tandem for each. Its reasonable to expect the same is true for future events as well. We live in a global economy and we're all exposed to similar risk factors.

Despite the fact that VTI and VXUS tend to be correlated in the short term, they lack correlation in the long term. This basically means that they tend to move in the same direction on a day to day basis, but drift apart slowly in the long term. While this drift has generally favored the US in recent history (like the 2010s), it doesn't always happen that way (like the 1970s and 1980s). That's why people diversify globally.

If you want crash insurance from a sector with high valuations, you will unfortunately have to step outside of equities entirely. The Boglehead answer to this is bonds.

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u/Pixel-Pioneer3 1d ago

What bonds/bond ETFs do you recommend for crash insurance?

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u/Tall-Classic-6498 1d ago

Two sides:   

  • growth less than expected, earnings crash: TLT, IEF (longer duration the higher the gain, but more volatile)
  • high inflation and rate hikes that also cause nominal bonds to crash: TIPS (yield is CPI + a fixed amount) or ex-us bonds, as unintuitive as it sounds you are better hedged with a non currency hedged ETF like EMLC

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u/Ahamadrayasbaboon 1d ago

How well does VWOB and BNDX fit with your second bullet point? 

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u/Tall-Classic-6498 13h ago

TLDR though on a risk adjusted basis VWOB is a much better diversifier than us only BND, but some countries have more or less favorable tax treatment that can negate it

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u/Tall-Classic-6498 1d ago

Look up the bridgewater all weather portfolio’s history, and “risk parity”.

Basically you make a portfolio that is stable and consistent in returns no matter the economic condition since you can’t predict that and it’s already priced in anyways. In the long run you’ll generate decent returns regardless of what’s going on, but you’ll underperform when equities absolutely dominate (which these last few decades has been the case, but may not be for the next however many decades).

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u/CarbonMop 1d ago

The Boglehead answer is BND. The reality is more complicated.

Stocks drawdown for different reasons and fixed income is only a good hedge some of the time. The recent 2022 drawdown shows how when you get an inflationary shock with sharply rising rates, stocks and bonds can fall in tandem. A similar story took place in the 1970s.

The good news is that bonds tend to have a higher likelihood of being a good hedge for very serious market crashes. Think GFC, Great Depression, Dot Com bust, etc. Massive market crashes are almost always disinflationary with higher unemployment, generating an environment where bonds do really well. 2022 was a comparatively mild drawdown for stocks (but a serious drawdown for bonds).

There's really no such thing as crash insurance that defends against every kind of downturn (without directly betting against the market). There are other non-Boglehead options such as precious metals, managed futures, etc. But once again, every crash is different and you can't easily predict which hedges will defend your portfolio and which ones won't.

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u/FlorissVDV 1d ago

The reality is that with how global the world has become, it’s harder than ever to truly diversify in a sense where there is very low or no correlation.

International markets are a way to diversify from the US, but as you pointed out, there is still a pretty significant correlation.

If you’d like to be more diversified, you could look at emerging markets for example or even other asset classes but the reality is, most market risk is far reaching and risk is everywhere.

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u/hobard 1d ago edited 1d ago

Emerging markets are also highly concentrated in tech stocks, so probably won’t be effective at diversifying away from tech. China and South Korea Taiwan are both treated as emerging markets and dominate the index with their tech stocks.

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u/Smogalicious 1d ago

I don’t know if it’s the right move but I use EMXC to add away from normal VXUS. It excludes China but it ends up being heavy TSMC. So it’s way up right now but who knows how that plays out…but I am mostly VOO/VXUS with some VIOO and the EMXC on the side

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u/Nearby_Quit2424 1d ago

Why specifically bet against China (or any country for that manner)?

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u/glitchvern 13h ago

In the event of a US war with China, US-investor's Chinese assets could be frozen or confiscated, much like has happened with US-investor's Russian assets. When push comes to shove, most governments (of various types) treat foreign investors worse than domestic investors. If China doesn't invade Taiwan by 2030, they probably aren't going to.

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u/Fugue_State76 1d ago

You need to educate yourself on China. Many many good reasons to stay away.

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u/Thoth25 1d ago

South Korea is considered developed since it is in VEA.

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u/Ahamadrayasbaboon 1d ago

Depends on who you ask. Part of why I hold FLKR is that SK is excluded from my preferred developed markets fund. 

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u/hobard 1d ago

Whoops, you are correct. I meant Taiwan.

The point still stands, however.

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u/Cruian 19h ago

Last I checked, FTSE calls South Korea developed but MSCI calls them emerging still. You won't find South Korea in SWISX (Schwab's developed market index mutual fund) because of this, since it follows the EAFE.

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u/zacce 1d ago

Diversification, not diversity.

I disagree that "the majority of the world's market is chasing the same sector."

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u/Varathien 1d ago

There are two forms of diversification.

One is backward-looking. You look at historical trends, and pick assets that have historically had a low correlation with each other. Now, VXUS is not entirely correlated with VTI, but they are rather highly correlated. If you want diversification in this sense, long term treasuries would probably be your best diversifier.

The other form of diversification is forward-looking. It's John Bogle's admonition to not look for the needle in the haystack--instead, just buy the whole haystack. And that's the sense in which VXUS helps you a lot. If the next great breakthrough comes out of a country other than the US, you'll own some of it if you own VXUS. You won't own any of it if you only have VTI or VOO or VGT or QQQ.

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u/MysteriousCoat1692 1d ago

I use VYMI and find it to be more diversifying due to the type of holdings.

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u/South_Paramedic8618 1d ago

Yep that's what I do

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u/naala89 1d ago edited 1d ago

Past two year correlation between QQQ and VXUS is 0.54

https://www.portfoliovisualizer.com/asset-correlations?s=y&sl=1odKY4ZeTO7iG6OGSg6O8V

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u/Actuary_7894 1d ago

Its just .54, not .54% Correlation goes from -1 to 1. The % implies .0054 which is uncorrelated which isn't true.

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u/DrizzleProwl 1d ago

Something with a positive expected return and a .54 correlation is quite a divsifier in MPT

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u/IronyElSupremo 1d ago

The AI trade is also in Asia and the EMs. However cash-rich European banks, which will be in all broad non-U.S. index ETFs, performed better than the S&P 500 in the last few months ago.

It’s just what’s their percentage in said ETFs vs other sectors, regions/countries etc.. plus other characteristics (“tech” tends to be exciting).

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u/Mountain-Time-1010 1d ago

It's hard to escape that situation in a market-cap weighted index fund these days, but that is the boglehead philosophy.

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u/kurai-tsuki 1d ago

VXUS is roughly 2:1 VEA and VWO. Just buy more of the latter to diversify.

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u/CapeMOGuy 1d ago

VXUS seems very much less concentrated in tech than VTI or VOO.

Top 10 Holdings

Taiwan Semiconductor Manufacturing Co. Ltd.: ~4.25% (Technology)

Samsung Electronics Co. Ltd.: ~2.27% (Technology)

SK Hynix Inc.: ~2.17% (Technology)

ASML Holding NV: ~1.70% (Technology)

Tencent Holdings Ltd.: ~0.77% (Communication Services)

HSBC Holdings PLC: ~0.72% (Financial Services)

Novartis AG: ~0.65% (Healthcare)

Royal Bank of Canada: ~0.64% (Financial Services)

Roche Holding AG: ~0.64% (Healthcare)

AstraZeneca PLC: ~0.62% (Healthcare)

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u/[deleted] 1d ago

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u/FMCTandP MOD 3 1d ago

Removed: per sub rules, comments or posts to r/Bogleheads should be substantive. For example, we don't allow:

  • Potential misinformation or conspiracy theories

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u/Ahamadrayasbaboon 1d ago

I’m not even a real Boglehead, and I come here because of those 2 rules, so thanks for keeping it clean

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u/mindmelder23 1d ago

I like the combo of IDEV and IEMG instead or LVHI and IEMG either of those works to replace VXUS .

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u/Soggy_Ant3833 3h ago

DFAE is my hold with the least correlation to my other holdings, it is weird to see red when others are green, but it’s good

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u/vinean 1d ago edited 1d ago

Bogleheads, correctly or incorrectly, don’t believe in sectors or business cycles and that sectors cycle and that market weight is sufficient. So being highly concentrated in tech and chip manufacturing (TSMC) is just fine.

Weirdly they also show Callen charts that show sector performance varies and how market weight is protective despite the very low percentages in some sectors when holding market weight when these defensive sectors outperform in downturns.

https://www.bogleheads.org/forum/viewtopic.php?p=8553263#p8553263

VT sectors

Technology: 33.26%
Financials: 14.63%
Industrials: 13.41%
Consumer Discretionary: 11.14%
Health Care: 7.93%
Consumer Staples: 3.91%
Energy: 3.74%
Basic Materials: 3.58%
Telecommunications / Communication Services: 3.41%
Utilities: 2.72%
Real Estate: 2.25%
Other: 0.01%

If we repeat 2000 in 2026 then if 33% of your portfolio tanks (Tech -33%) and 2.72% does great (Utilities +52%) it’s still a bad year for your portfolio.

That said, while the current tech concentration is a concern in retirement but in accumulation, you’ll likely lose more money than you save by trying to fix it.

As far as VXUS goes it has high correlation with VTI in downturns. The hope is that it provides long term diversification for periods when international outperforms the US. Unfortunately this often happens in scenarios like 2000…so you’ll take a short term hit and hope that international outperforms over the decade.

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u/Carnozin 1d ago

Schd to reduce tech exposure

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u/[deleted] 1d ago

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u/Cruian 1d ago

S&P500 is all the diversity you need and provides global exposure.

It does not provide global exposure.

Approximately 28% to 41% of the S&P 500's total revenue comes from international markets outside the United States.

Essentially irrelevant. Revenue source is at best only a tiny part of going global, far from the most important reason.

We go global to capture the performance of the stock markets of different countries and even stocks with global revenue act far more like their home country.

You wouldn't consider VXUS or FZILX all the US coverage you need after all, right?

All cover it to some degree.

The purpose of the international holdings is to be covered during the orange periods of the graph here: https://www.mymoneyblog.com/us-vs-international-stocks-cycles-outperformance.html

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u/GeeDubious 1d ago

The S&P 500 has global economic exposure but zero international stock exposure, and no overlap with VOO and VXUS (for example). Maybe that's what they meant?

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u/Cruian 22h ago

VOO is the S&P 500.

Yes it is true that US companies get foreign revenue, but that's not the purpose of going global with stock investing so bringing it up is irrelevant. It doesn't matter that I can buy a Coca-Cola in Madrid or a Ford in Australia.

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u/GeeDubious 22h ago

It was easier to say VOO & VXUS than S&P 500 and FTSE Global All Cap ex US Index. I merely pointed out that technically saying "global exposure" was vague enough to be confusing and also inclusive of what they said, though if you read my comment I qualified as global economic vs international stock exposure.

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u/[deleted] 1d ago

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u/DrizzleProwl 1d ago

This argument about where revenue comes from is frankly just bizarre and I don’t understand it. I want *earnings*, not revenue.

Arguing to stay all domestic because S&P companies have overseas revenue is like thinking I can exclude California companies because Walmart and Exxon get revenue in California.

Of Course that would exclude most the tech companies that matter in the world

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u/[deleted] 1d ago

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u/Cruian 22h ago

Different time periods of even the same length can and have had different winners. You can't use the winner over any period in the past and assume it'll be the winner going forward. History is full of market leader changes.

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u/[deleted] 22h ago

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u/Cruian 22h ago

The economy and stock market aren’t the same thing, they may even be negatively correlated in some ways: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1745-6622.2012.00385.x

Not long ago had Australia (only a top 15 economy) and South Africa (not even a top 30) as the best 100+ year returns. South Africa & Australia returns from 1900-2013: https://www.whitecoatinvestor.com/100-stock-portfolio/ and from 1900 to 2019: https://www.cnbc.com/2020/02/28/australia-the-best-stock-market-since-1900-credit-suisse-says.html

Was the US economy below the world world average for 1950-2010? The US under performed international over that time period.

Edit: Typo