Vanguard VGK ETF Beats VTI and VOO: Europe Diversification

For investors heavily concentrated in U.S. equities through popular Vanguard ETFs like VTI and VOO, the argument for international diversification is strengthening as U.S. stock valuations reach elevated levels. While maintaining a U.S.-focused portfolio has historically provided exposure to America’s economic ascent, current market conditions suggest that complementing these positions with international exposure could offer both diversification benefits and access to more attractive valuations. The U.S. market, after an impressive three-year bull run, no longer appears cheap by traditional valuation metrics, potentially setting the stage for more modest returns ahead.

The diversification argument becomes particularly compelling when considering the concentrated AI exposure in U.S. markets. As noted in financial commentary, including perspectives from Andrew Ross Sorkin, concerns about potential market corrections highlight the importance of proper diversification to weather potential downturns. European markets, with less direct exposure to AI-driven tech titans, might experience less severe impacts during any AI-related market disruption, providing a valuable hedge for U.S.-heavy portfolios.

The Vanguard FTSE Europe ETF (VGK) has demonstrated exceptional performance in 2024, rising 26.7% year-to-date and outperforming not only the VOO and VTI (both up approximately 13%) but also surpassing the Nasdaq 100’s 17% gain. This outperformance is particularly noteworthy given VGK’s focus on European markets, which have traditionally trailed U.S. equity returns in recent years. The strong performance challenges conventional wisdom about international diversification being a drag on portfolio returns.

Despite this significant outperformance, VGK maintains an attractive valuation profile with a price-to-earnings multiple of just 16.5 times. This represents a substantial discount to broad U.S. market valuations and provides exposure to well-known European growth companies trading at significant discounts to their U.S. comparables. The valuation gap between U.S. and European equities creates a compelling risk/reward scenario, especially as U.S. tariff risks increase alongside rising P/E ratios in domestic markets.

The ETF’s ultra-low 0.06% expense ratio makes it cost-effective for long-term investors seeking international exposure without sacrificing the low-cost advantage that makes Vanguard ETFs so popular. This combination of strong performance, attractive valuations, and minimal costs positions VGK as a serious contender for portfolio allocation alongside traditional Vanguard favorites.

For investors considering VGK as a complement to their VTI or VOO holdings, the ETF offers exposure to compelling European growth themes at discounted prices. The portfolio includes companies involved in emerging sectors such as GLP-1 drugs, semiconductor machinery, and AI-driven software, providing access to global technological trends through European companies that may offer better value than their U.S. counterparts. This thematic exposure, combined with geographic diversification, creates multiple layers of portfolio enhancement.

The current market environment, characterized by elevated U.S. valuations and increasing global economic uncertainties, strengthens the case for strategic international allocation. While VTI and VOO remain excellent core holdings for their broad U.S. market exposure, VGK provides a targeted opportunity to capitalize on European market strength and valuation disparities. The question isn’t whether to abandon U.S. equities entirely, but rather how to intelligently complement them with international exposure that offers both diversification and return potential.

As the bull market in European equities continues to demonstrate resilience, the VGK ETF represents a practical solution for investors seeking to balance their U.S. exposure with international opportunities. Based on valuation metrics alone, VGK appears positioned to potentially continue its outperformance relative to VOO and VTI, making it a worthy consideration for investors looking beyond domestic markets while maintaining the Vanguard quality and low-cost structure they trust.