The U.S. stock market has seen over ten years of solid gains, yet signs of a possible recession are increasing. Inflation is stagnant, interest rates could be pressuring corporate profits, and various geopolitical issues—like trade disputes and international conflicts—are adding to the uncertainty. Analysts point out that overvalued tech stocks and decreasing consumer spending might spell trouble for the global economy.
In a scenario where domestic indexes could drop by 20% or more, diversification is crucial. There are opportunities beyond U.S. borders that can be less affected by U.S. challenges. Regions with lower valuations and higher growth prospects might help portfolios endure downturns while positioning them for an eventual recovery.
This strategy doesn’t guarantee profits, of course, but it seems like a sensible way to hedge against a long-term decline focused on the U.S.
For those looking for stability outside the U.S., the Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) appears to be an affordable entry into a robust economy. Started in 2007, VEA focuses on developed countries rather than emerging markets or the U.S., featuring a mix of over 4,000 stocks from places like Japan, the UK, Canada, and Switzerland.
Major holdings include ASML Holding (NASDAQ:ASML), SAP (NYSE:SAP), and Novo Nordisk (NYSE:NVO), but the fund includes many companies, with no single stock representing more than 1.5% of it. The portfolio is spread across various sectors, providing a good balance.
So, why is VEA appealing especially if the S&P 500 might crash? The geographical diversification means it doesn’t correlate as closely with U.S. events. For instance, during the decline of the S&P 500 in 2022, which dropped 19%, VEA only saw a 14% decline, thanks to stability in developed markets in Europe and Asia.
Looking at more recent performance, VEA achieved a total return of 22% over the year ending October 22, 2025, while the Vanguard S&P 500 ETF (NYSEARCA:VOO) had a return of 15.5%. This advantage was largely driven by a recovery in Japanese stocks and modest gains in Europe amid lessening energy pressures.
When considering three-year returns, however, VEA falls behind VOO with 77% compared to VOO’s 87%. Still, VOO has been significantly influenced by tech giants, which dominate its performance, heightening risk for the S&P as a whole.
With an expense ratio of just 0.03%, more returns benefit investors. In a downturn, VEA might experience slightly less volatility, with a standard deviation of around 12% compared to VOO’s 13%.
Morningstar analysts appreciate VEA’s diversification benefits, suggesting it can bring value without taking on too much risk. If you’re holding VOO, allocating a portion—maybe about 25%—to VEA could potentially stabilize your returns across various market cycles. Recent capital inflows reached $10.5 billion in 2025, reflecting strong institutional confidence. With U.S. stock valuations climbing, VEA might present a valuable alternative amid recession worries.
Moving towards potentially higher rewards, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) focuses on rapidly evolving economies like China, India, and Taiwan. Launched in 2005, VWO includes around 5,500 stocks, primarily in large and mid-cap categories.
The ETF largely covers investment sectors in emerging markets, particularly in financials, technology, and consumer goods. Major holdings include Taiwan Semiconductor Manufacturing (NYSE:TSM), Tencent Holdings, and Alibaba (NYSE:BABA), making up over 20% of its assets. This setup is banking on trends like demographic growth and urbanization which are not as prevalent in the U.S. market anymore.
The attractive aspect of VWO in a downturn lies in its countercyclical behavior. Emerging markets usually trail the U.S. during economic booms but rebound strongly as conditions shift, like when the dollar weakens or commodity prices rise. Historical data shows that since 2008, the cumulative return for VWO over the next three years has been 71%, in comparison to the S&P 500’s 88%. More recently, VWO yielded a total return of 18.2% over the past year, outpacing VOO’s 15.54%. It’s also up 24% since the start of the year, driven by India’s impressive 7% annual GDP growth and China’s stimulus efforts which are bolstering its tech and real estate markets.
In a three-year frame, VWO’s annualized return stands at 7.8%, slightly lower than VOO’s 8.2%, but remains competitive, especially given that emerging market volatility is around 12%, similar to VOO’s, while offering a better yield. VWO boasts a dividend of 2.7%, compared to VOO’s 1.1%.
The expense ratio is a mere 0.07%, rendering costs quite manageable. A key player is Reliance Industries, an Indian energy and telecom giant that enjoyed a 25% rise in domestic consumption in 2025. If an S&P crash occurs due to Federal Reserve tightening, a weaker dollar could favor VWO, which previously outperformed by 10 percentage points during the pandemic recovery of 2020.
Despite concerns about currency risks and political instability, the diversifying nature of VWO helps mitigate risks from individual countries, capping exposure to China at 30%. BlackRock strategists suggest this kind of investment should ideally take up 10% to 15% of your portfolio for recession hedging.
VWO, managing $138 billion in assets, attracted $5 billion in net flows this year, underscoring its significance as a growth driver. As the U.S. tech scene stumbles, VWO’s P/E ratio of 11 makes it appealing in an undervalued area likely to catch up soon.
