Funds and Forecasts: A Mildly Skeptical View

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Goldman Sachs, a firm whose pronouncements I tend to greet with the same cautious optimism I reserve for airline food, has issued a ten-year forecast for global equities. Apparently, they believe the S&P 500, that relentlessly upward-trending line on every financial news channel, will chug along at a respectable 6.5% annually. Respectable, yes, but – and this is where things get interesting – they suspect Europe and emerging markets might actually do better. One almost feels a flicker of hope, quickly extinguished by the realization that “better” in the investment world is a relative term, and rarely involves actual, meaningful gains for the average investor.

Europe, they say, could return 7.5%, buoyed by earnings growth, dividends, and a bit of corporate stock buyback magic. Emerging markets, with a particular focus on the economic powerhouses of China and India, are projected to hit a rather ambitious 12.8%. Now, I’ve learned to treat any forecast involving double-digit returns with the same level of skepticism I reserve for claims of perpetual motion, but it’s a number that, for a fleeting moment, makes one consider dusting off the atlas.

For those inclined to follow the herd, Vanguard offers a couple of ETFs to facilitate this potential geographic diversification: the Vanguard FTSE Europe ETF (VGK) and the Vanguard FTSE Emerging Markets ETF (VWO). Cheap and convenient, they say. And, let’s be honest, in the world of finance, “cheap” and “convenient” are often the best one can realistically hope for.

Europe: A Continent of Intrigue (and Moderate Returns)

The Vanguard FTSE Europe ETF, as the name suggests, holds about 1,200 companies scattered across Europe. Mostly in the UK, Switzerland, France, and Germany, because, well, that’s where most of the companies are. It’s heavily weighted toward financials, industrials, and healthcare – the usual suspects. Think banks, factories, and people trying to keep us alive, all wrapped up in one neat little package.

The top five holdings are ASML Holding, Roche Holding, HSBC Holdings, Novartis, and AstraZeneca. These are, undeniably, large companies. They make things. They provide services. They employ people. Whether they’ll actually deliver outsized returns remains, as always, an open question.

It’s worth noting, however, that the last decade hasn’t exactly been kind to European equities. While the S&P 500 soared a remarkable 335% (15.8% annually), the Vanguard FTSE Europe ETF limped along with a 174% return (10.5% annually). A difference of 161 percentage points. Ouch. Goldman Sachs argues that U.S. stocks are currently overpriced, and that European stocks, trading at more reasonable valuations, could outperform. They also predict a weakening dollar, which would further boost returns for U.S. investors. A comforting thought, if one believes in the predictive power of investment banks.

I’d still keep a larger portion of my portfolio in an S&P 500 index fund, simply because history suggests it’s a slightly less risky proposition. But the Vanguard FTSE Europe ETF is a perfectly acceptable way to get some exposure to European equities, especially given its low expense ratio of 0.06% – a mere $6 annually for every $10,000 invested. In the grand scheme of things, that’s practically free money. Almost.

Emerging Markets: A Land of Opportunity (and Considerable Risk)

The Vanguard FTSE Emerging Markets ETF holds about 6,200 companies from, well, emerging markets. Mostly in China, Taiwan, and India. It’s heavily weighted toward technology, financials, and consumer discretionary – the things people buy when they have a bit of disposable income. Which, in many emerging markets, is a relatively recent phenomenon.

The top five holdings are Taiwan Semiconductor, Tencent Holdings, Alibaba Group, HDFC Bank, and Reliance Industries. These are, undeniably, powerful companies. They’re shaping the future of technology and commerce in some of the fastest-growing economies in the world. Whether they’ll actually deliver on their potential remains, as always, a matter of speculation.

Like Europe, emerging markets have lagged behind the U.S. in recent years. The S&P 500 returned 335% over the past decade, while the Vanguard FTSE Emerging Markets ETF managed a mere 162% (10.1% annually). A difference of 173 percentage points. Again, ouch. Goldman Sachs argues that emerging markets will outperform in the next decade, thanks to stronger earnings growth, higher dividend yields, and a weakening dollar. A compelling argument, if one is willing to ignore the inherent risks of investing in countries with, shall we say, complex political and economic landscapes.

Personally, I find the emerging market fund slightly more compelling than the European one. The Chinese and Indian economies are projected to grow at a significantly faster rate than those of Europe and the U.S. in the coming years. And, like the European fund, the Vanguard FTSE Emerging Markets ETF has a low expense ratio of 0.06%. A rare victory for the small investor.

However, I suspect Goldman Sachs may be underestimating the potential for U.S. companies to increase their earnings in the years ahead, particularly with the rise of artificial intelligence. They were wrong about the S&P 500 in 2015, predicting a 5% annual return when it actually delivered 11.8%. So, I’d still keep a larger portion of my portfolio in an S&P 500 index fund. Because, in the end, past performance is no guarantee of future results, but a healthy dose of skepticism is always a good idea.

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2026-02-16 12:24