Vanguard Sees Developed Markets Outside U.S. Outperforming AI Boom Winners

In its July Market Perspectives report, Vanguard published an analysis that challenges a widespread assumption about which stocks will win most from the artificial intelligence boom. Many investors have assumed that major U.S. growth stocks, technology companies, and AI hyperscalers—the firms building the core AI tools—would be the biggest beneficiaries. But Vanguard's research team argues that "the next phase of the AI story is more about whether current investment translates into productivity gains for the broader global economy." This framing suggests that as AI tools spread beyond the technology sector, companies, industries, and countries outside the U.S. may outperform the U.S. growth stocks that have driven the initial AI rally.

To support this thesis, Vanguard's 10-year forecast from the Vanguard Capital Markets Model projects that developed markets outside the U.S. will outperform U.S. stocks overall, and especially U.S. growth stocks. The firm expects developed markets ex-U.S. equities to deliver average annual returns of 4.5% to 6.5% during the next 10 years, compared to 3.6% to 5.6% for U.S. growth stocks. This projection underpins the case for international diversification.

To help investors implement this strategy, the article examines two developed-market international ETFs. The State Street SPDR Portfolio Developed World ex-US ETF (SPDW) holds 2,436 global stocks from developed markets across 25 countries. Its top holdings by country are Japan (21.8%), the U.K. (11.3%), Canada (10.8%), South Korea (7.9%), and France (7.2%). Because SPDW includes South Korea, it captures top semiconductor and memory chip stocks like Samsung Electronics and SK Hynix, alongside Dutch semiconductor giant ASML Holding, international banks from Canada, Japan, and the U.K., and Swiss pharmaceutical stocks Roche Holding AG and Novartis. Over the past five years, SPDW has delivered annualized returns (by net asset value) of about 9.8%; over three years, 17.9%; and over the past year, 29.6%. Its expense ratio is 0.03%, and its trailing-12-month dividend yield (as of August 13) is 3%.

The Vanguard International High Dividend Yield ETF (VYMI) offers an alternative approach, holding 1,565 stocks—mostly from developed markets but with some emerging-market exposure—focused on value stocks likely to pay strong dividends. Its top markets by weight are Japan (11.5%), the U.K. (11%), Canada (9.2%), Switzerland (7.6%), and Australia (7.3%), spanning 45 countries total. The fund's top 10 holdings include international banks from Canada, Japan, Spain, and the U.K., Swiss pharmaceutical giants, energy major Shell PLC, and consumer staples maker Nestlé. VYMI has significantly outperformed SPDW, delivering annualized returns of 14.1% over the past five years, 21.5% over three years, and 34.6% over the past year. Its expense ratio is 0.07%, and its dividend yield is 3.5%—higher than SPDW's. The author notes that while neither fund is owned personally, both appear suitable for broadly diversified portfolios at low cost. For investors seeking only developed-market stocks, SPDW is recommended; for those willing to accept some emerging-market exposure and prioritize strong dividend income, VYMI offers a combination of steady dividends and growth potential.