This article was originally published at The Humble Dollar.
Do I sound like a broken record? Last week, the performance gap between U.S. and foreign stocks widened even further. The Vanguard Total Stock Market Index Fund ETF (NYSE:VTI) has now returned 21.6% so far in 2021, while the Vanguard FTSE All World ex-U.S. ETF (NYSE:VEU) is up just 9.4%.
International funds’ relative weakness has become so routine that it rarely makes the financial news. What’s different this time: The economic landscape would seem to favor foreign shares, particularly emerging markets.
Go back one year. Stock markets around the world were in a garden-variety correction—dropping about 10% from their third-quarter peak—with technology companies feeling the brunt of the selling. Small caps and value sectors were holding up a little better.
Then the buying frenzy began anew, and we got the second wave of the COVID-19 bull market that began in March 2020. As 2021 dawned, foreign markets were outperforming, propelled in part by a weakening dollar. But the dollar reversed course and U.S. stocks soon nosed ahead—and that’s where they’ve stayed.
Now consider today’s economic backdrop: inflation fears, climbing commodity prices and rising interest rates. In the mid-2000s, when these factors converged, they proved bullish for foreign firms, especially those in emerging markets. In 2003, 2005 and 2007, emerging market indexes led the bull market charge. That isn’t happening this year. While commodities are on fire in 2021, shares of foreign companies just can’t find their footing—at least relative to the S&P 500.
If you’re like me, you own a globally diversified basket of low-cost index funds, which means just a portion of your portfolio is invested in large-cap U.S. stocks. It can feel like you’re missing out, even if your overall portfolio is up handsomely in 2021.
It’s even tougher for older investors who have a high allocation to bonds. Vanguard Total Bond Market ETF (NASDAQ:BND) is down 2.1% in 2021, rivaling its 2013 loss, which was the worst year since the fund began trading in 2007. And that’s with dividends reinvested. Seeing inflation eat away at returns only adds to the unpleasantness.
Bottom line: Financial markets are having a party—but many investors aren’t having a great time.