VEA Is Cheaper Than Its Own Past, But Are You Getting a Deal?

This basket of international stocks is trading at a discount to its own history, but the real question is whether the earnings inside justify the price.

The companies inside the Vanguard FTSE Developed Markets ETF (VEA) are expected to grow their earnings, yet the fund trades at a lower multiple than its recent past. That’s an interesting setup, especially when you consider the alternative. Today, the fund’s holdings offer an aggregate earnings yield of 8.8%, which is a significant step up from the 4.4% you could get from a 10-year US Treasury. The question is whether that extra yield is fair compensation for the risk.

A Price Tag Below The Five-Year Norm

Let’s start with the price. VEA’s trailing price-to-earnings ratio is 11.4. To put that number in context, you have to compare it to the fund’s own history. Over the last five calendar year-ends, that same P/E ratio has averaged 17.6. So, today’s price is about 35% below that 5-year average. On the surface, that looks like a discount.

Are the Earnings Pulling Their Weight?

A lower price is only a good deal if the value underneath is solid. Is the market pricing in a collapse in earnings? The data suggests the opposite. The consensus forward price-to-earnings ratio for the fund is about 9.4. When the forward multiple is lower than the trailing one, it signals that analysts expect earnings to grow. This isn’t a story of deterioration; it’s a story of expected growth being valued at a multiple well below the fund’s historical norm. Of course, this basket of 3873 positions is driven by its largest holdings, namely companies like Samsung Electronics at 3.0% of the fund and SK Hynix at 2.6%. Their performance will heavily influence whether those earnings forecasts materialize.

The Compensation For Taking The Risk

This brings us back to the most fundamental question for any investor: why own stocks instead of safe government bonds? The answer is the extra return you expect for taking on the uncertainty of owning businesses. For VEA, the earnings yield of 8.8% sits a full 4.4 percentage points above the 4.4% risk-free Treasury yield. That is a substantial cushion, and it’s the core justification for owning this basket of companies today.

What An Owner Of The Basket Should Weigh

So, is today’s price for VEA justified? The numbers suggest a reasonable case. You’re paying a multiple below the fund’s own recent average for a basket of companies expected to grow their earnings, and you’re being offered a healthy earnings yield over the risk-free alternative. The thing to remember is that as an index fund owner, you get everything, the winners and the laggards. You are buying the entire FTSE Developed All Cap ex US Index at the market’s price. For investors who prefer to be more selective, a different, quality-screened approach might be the answer. For owners of VEA, the key metric to watch is that forward P/E of 9.4. If it starts to climb without a corresponding rise in earnings, it would suggest the discount is closing.

How Do You Know You Picked The Right Fund?

VEA sits close to its own historical price, which only sharpens the question of which funds are actually mis-priced. An ETF gives you instant, diversified exposure to an idea, which is exactly why so many investors start there. The trouble is that a good idea bought at the wrong price makes a mediocre investment, and few ETF buyers ever check how their fund’s valuation and risk stack up against the alternatives. Our ETF Valuation and Performance Scorecard does that across the whole equity universe at once, ranking every fund by risk-adjusted return and then showing what each one costs versus its own history. And for the part of a portfolio where you would rather a system did the choosing, the Trefis High Quality (HQ) Portfolio holds 30 individually screened names, re-balanced by rule, with a track record of outpacing a benchmark that combines the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000.