The Vanguard Total International Stock Index
A detailed look at one of the most popular international indexes
The Vanguard Total International Stock Index fund provides broad and low-cost exposure to non-U.S. stock markets around the globe, including developed as well as emerging markets, with over 6,000 equities in its portfolio. The index is available to investors as a mutual fund (ticker symbol VGTSX) or an exchange-traded fund (ETF) (ticker symbol VXUS).
ETF vs. Mutual Fund
The Vanguard Total International Stock Index mutual fund and ETF share the same underlying index, but they involve different levels of commissions, trading costs, tax implications, and other considerations.
The Vanguard Total International Stock Index ETF trades under the ticker symbol VXUS with a 0.11 percent expense ratio that's 90 percent lower than the industry average. As an ETF, the fund incurs a small brokerage commission when buying and selling and may trade at a discount or premium to the net asset value. The upshot is that ETFs are more tax efficient and are more easily bought and sold in the open market.
The Vanguard Total International Stock Index mutual fund trades under the ticker symbol VGTSX with a 0.18 percent expense ratio. As a mutual fund, it doesn't incur any commissions or spread costs and always trades at its net asset value. The downside is that mutual funds are less tax-efficient and have more restrictions on buying and selling compared to ETFs.
Digging Into the Portfolio
The Vanguard Total International Stock Index provides 43.2 percent exposure to Europe, 30.2 percent exposure to the Asia-Pacific, 18.9 percent exposure to Emerging Markets, and 7.1 percent exposure to non-U.S. North America, as of January 31, 2017. In terms of industry exposure, the index is concentrated in financial services (21 percent), industrials (12 percent), consumer cyclicals (11 percent), consumer defensive (9 percent), technology (9 percent), and basic materials (9 percent). Other sectors like energy, telecommunications, and real estate account for the remainder of the portfolio.
Investors should keep in mind that the portfolio is market-capitalization-weighted, which means that the portfolio focuses on the largest companies in the world. In fact, the components of the index have an average market capitalization of $23 billion, with only 16 percent exposure to mid-cap stocks and 4 percent exposure to small-cap stocks. This could potentially limit the diversification benefits of holding smaller asset classes that don’t move in tandem with global markets.
Expenses and Risk Factors
The Vanguard Total International Stock Index funds have significantly lower expense ratios than funds with similar holdings. The mutual fund version of the index offers an expense ratio that could save investors upward of $2,000 for every $10,000 invested over a 10-year period relative to competing funds.
Minimizing fees is extremely important since every dollar paid out is not only lost, but investors miss out on the compounding interest of that dollar over time. For example, investing $100,000 in a fund that generates a 6 percent annual return with a 0.9 percent fee versus a 0.25 percent fee will lose out on nearly $100,000 over a 30-year period. The Vanguard Total International Stock Index is among the most attractive international funds due to its low costs compared to competing funds.
Investors should also consider other potential risk factors. For example, the top ten largest holdings account for over 8 percent of the portfolio, which means that these companies could have an oversized impact on the entire fund. The fund is also highly concentrated in European stocks - with over 40 percent exposure - which means that any problems in Europe could adversely impact the entire fund.
Alternatives to Consider
Many different funds provide exposure to international markets, including international funds (which exclude the U.S.) and all-world funds (which include the U.S.). Investors looking to diversify a domestic portfolio may want to consider international funds, while those looking for an all-in-one fund should take a look at all-world funds. The Vanguard Total International Stock Index is an international fund that excludes the U.S., although Vanguard also offers all-world funds like the Vanguard Total World Stock ETF (ticker symbol VT).
The most comparable fund to the Vanguard Total International Stock Index fund is the larger Vanguard FTSE All-World ex-U.S. ETF (VEU), which has roughly double the assets but a slightly higher expense ratio of 0.15 percent versus 0.11 percent. The key difference between the two is that Vanguard FTSE All-World ex-U.S. ETF does not include any small-cap exposure, has greater concentration in the financial services sector, and has slightly more geographic diversification in emerging markets.
Some other ETFs to consider include:
- iShares Core MSCI Total International Stock ETF (IXUS).
- iShares MSCI ACWI ex-U.S. ETF (ACWX).
- SPDR MSCI ACWI ex-U.S. ETF (CWI).
The Bottom Line
With over 6,000 holdings, the index provides diversified exposure to mid- and large-cap equities around the world with an expense ratio that’s significantly lower than the industry average. Investors should keep in mind, however, that there are many options to choose from and select the ETF or mutual fund that’s right for their individual situation.