Wall Street Sees 37% Upside Over the Next 12 Months for This Vanguard ETF

The Iran war and the artificial intelligence (AI) trade have mostly kept investors focused on U.S. equities. But the post-U.S. midterm plunge in tech stocks should have you looking elsewhere for opportunities.

Wall Street analysts see 37% upside over the next 12 months for the Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) when you look at rolled-up analyst ratings of the stocks that the fund owns.

Like the Nasdaq-100, this fund also dropped into correction territory and has enhanced the short-term buy-low investment case. Trading at just 13 times next 12 months' earnings and with investors demonstrating a desire to rotate out of mega-cap tech, emerging markets could be the best risk/reward alternative.

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The midterm election gave emerging markets its catalyst

As you already know, Democrats won control of both chambers of the U.S. Congress on Nov. 3. That potentially means a completely different outlook for the political environment.

The most likely outcome of this, in my opinion, is that there will be a rapid push to end the war in Iran. This has already been reflected in the energy market, where Brent crude oil prices fell from as high as $119 a barrel before the election to around $96 currently. Since most large developing economies import their oil, this group could finally see a significant financial pressure start to ease.

Also expect Congress to look for ways to dial back tariffs, another unnecessary expense for businesses not just in emerging markets but all around the world.

How to invest for this in your portfolio

Odds are good that you're already heavily invested in U.S. large-caps, tech, and growth stocks, and you have very little invested directly in emerging markets stocks.

There's nothing wrong with keeping the S&P 500 (SNPINDEX:^GSPC) as the core of your portfolio. However, emerging markets add diversification, both in terms of sectors and economic activity, as well as higher growth potential. They also trade at a sizable discount.

I don't think you necessarily want to make a huge overweight to the Vanguard FTSE Emerging Markets ETF here given the overall uncertainty in this category. A 5% allocation is a good start, or perhaps 10% if you're feeling a little more aggressive.

Watch two things here. One is the direction of Brent crude oil prices. If the war reaches a resolution, oil prices will likely fall sharply, which is a positive for emerging markets. The second factor is whether the increased scrutiny of AI results in a real slowdown in development. That alone would probably send emerging market stock prices lower, but not to the degree that would be seen in U.S. stocks.

If those two factors play out, they could be the catalyst for 30%-plus gains for emerging markets.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard FTSE Emerging Markets ETF. The Motley Fool has a disclosure policy.