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Sunday, February 4, 2018

International Investing with funds (VGTSX, VEIEX, VDVIX, VFSVX, VFWIX, VXC, VEE)

(Source: Fidelity.com)

I had written an earlier article on the need for international investing. This is a follow up article on different international mutual fund and ETFs offered by Vanguard. As a passive investor I will be focusing exclusively on index funds.

Related: Reasons you should invest internationally?


Vanguard international funds are broadly spread across two different markets, developed market (Japan, United Kingdom, Canada, France, Germany, Switzerland etc.) and emerging markets (Brazil, Russia, India, Taiwan, China, and South Africa etc.) funds.

The first awesome fund from Vanguard is Total International Stock Index Fund. In fact it is one of the few Vanguard select funds. A Vanguard select fund is a long standing fund (history) that is diversified with at least 10 billion dollars under management (AUM). It provides a cheap way to get broad exposure to international stocks.

It tracks the FTSE Global All Cap ex US Index. It gives broad exposure to both emerging and developed markets. Its market capitalization based and hence is tilted towards developed markets and large capitalization stocks. Emerging markets constitute 20.3% of the total holdings and 79.7% of holdings are in developed markets. It is categorized as a large cap fund.

Market Capitalization Diversification

This fund includes 6,283 stocks spanning 45 countries. Considering the number of stocks it is almost impossible for one or two holdings to have a sizeable impact on the fund. The largest position is Tencent Holdings (China, 1.20%). The top 10 constituents account for 7.95% of the holdings. The top 10 holdings are,

  1. Tencent Holdings (China), 1.20%
  2. Nestle (Switzerland), 1.02%
  3. Samsung Electronics (Korea), 0.84%
  4. HSBC Hldgs (UK), 0.81%
  5. Taiwan Semiconductor Manufacturing (Taiwan), 0.80%
  6. Novartis (Switzerland), 0.76%
  7. Toyota Motor (Japan), 0.67%
  8. Roche Holdings (Switzerland), 0.65%
  9. Royal Dutch Shell (UK), 0.60%
  10. British American Tobacco (UK), 0.59%

17.41% of the stock holdings are from Japan and is the largest holding in the fund. It is followed by UK (12.53%), Canada (6.63%), France (6.37%) and Germany (6.35%). From the emerging markets China has the largest exposure at 5.98%.

Market Region Diversification

This fund is also diversified across different sectors. Technology constitutes only 7% of the portfolio. In comparison S&P 500 has 23.8% in Technology. Financials are the largest category at 26%.

Market Sector Diversification

For comparing performance I used the US Total Stock Market Index. VGTSX/VXUS has outperformed the US stock market index in the last year. However, the 10-Year average annual performance is very poor. As a passive investor we don’t pick winners and losers. We try to hold the market as whole (Based on the average 3/5/10 Year average performance the US stock market should have outperformed international index in 2017). Use past performance to determine consistency and risk.

Total International Stock Index Fund is available in 3 flavors. As an investor fund (VGTSX), as an ETF (VXUS) and as an admiral fund (VTIAX). VTIAX requires a minimum investment of 10,000 dollars.

Related: ETF vs Mutual fund? Which one is a better choice?

VGTSX has an expense ratio of 0.18%, 83% lower than the average expense ratio of funds with similar holdings. It has a trailing twelve month (TTM) yield of 2.68%. VXUS has an expense ratio of 0.11%, 90% lower than the average expense ratio of funds with similar holdings. It has a TTM yield of 2.59%. Total International Index fund has a P/E of 15.9. VGTSX has $121.8 billion assets under management.

One of the cons of this fund is lower exposure to emerging market stocks. Over a time I have seen that investors tend to tilt their international exposure towards emerging markets. This might be because of lower valuations and higher (predicted) growth rates. Vanguard has an excellent emerging market index fund (VEIEX/VWO). VEIEX provides a low-cost way to gain exposure to emerging markets. VEIEX has an expense ratio of 0.32% (VWO: 0.14%) and a yield of 2.14%. It has a low P/E of 15.4.

On the other hand not everyone has the appetite for risk associated with emerging markets. Developed markets might provide the necessary international diversification with lower risk. The way to go about it would be through Developed Markets Index Fund (VDVIX, VEA). VDVIX has an expense ratio of 0.17%, yield of 2.68% and P/E of 16.1.

By using the developed and emerging market ETFs it is possible to slice the portfolio based on a particular risk assessment.

Another con of Total International Stock Index fund is they lack exposure to small capitalization stocks. I have noticed that younger investors tend to tilt their portfolio towards small caps. Vanguard has that covered through their FTSE All-World ex-US Small-Cap Index fund (VFSVX/VSS). It provides low-cost exposure to stocks of small-capitalization companies in non-U.S. markets. VFSVX (mutual fund) has an expense ratio of 0.27% (82% lower than the average expense ratio of funds with similar holdings) and 12 month trailing yield of 2.73%. VSS has an expense ratio of 0.13% of and yield of 2.84%.

www.betterment.com: “Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns.”

There are two Vanguard international index funds. I already mentioned Total International Stock Index Fund (VGTSX, VXUS). The other international fund is FTSE All-World ex-US Index Fund (VFWIX, VEU). There is no real difference in their holdings and performance. You could potentially own either fund as a part of your core international stock holding. Alternatively you could use it for tax loss harvesting. The reason I did not mention VFWIX before is because it has a slightly higher expense ratio of 0.23%. VXUS has the same ER as VEU.

Disclaimer: Tax loss harvesting is not for everyone. You should not make any decision, financial, investments, trading or otherwise, based on any of the information presented on this blog without undertaking independent due diligence and consultation with a professional broker or competent financial adviser.

I checked out Vanguard Canada for equivalent funds. Similarly, FTSE Emerging Markets All Cap Index ETF (VEE) invests primarily in the emerging markets. VEE has a MER of 0.24% and 12 month trailing yield of 1.89%. I believe the difference in yield is due to currency differences.

For developed markets a combination of ETFs need to be used, FTSE Developed Europe All Cap Index ETF (VE) and FTSE Developed Asia Pacific All Cap Index ETF (VA).

If you want to avoid the hassles of owning multiple ETFs, you could try FTSE Global All Cap ex Canada Index ETF (VXC). VXC invests primarily in developed and emerging markets, excluding Canada. It has a MER of 0.27% and 12 month trailing yield of 1.68%.


Source: Vanguard, Vanguard Canada, Google Finance














10 comments:

  1. Vanguard certainly has a lot of options that are pretty solid so an investor can tailor their portfolio to whatever they need. I do think the total international fund is probably the easiest way for most people to go about it.

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    1. I love VXUS, it is 29% of my portfolio. Might drop it down to 20%.

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  2. Nice overview divgeek - there are quite a few options out there. Like Timeinthemarket above, whenever I do invest internationally I usually keep it very simple with either a US ETF or Global ETF. I'm definitely very bias towards our home country though!

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    1. Yes it makes sense to invest locally. Australia has not had a recession in past. But, it is only around 5-10% of the world market.

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  3. I'm with you here Mr. Geek. I mainly go the fund route to get non US based equity exposure. I just do not want to commit the time researching foreign stocks. Tom

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    1. Researching is sometimes not even possible. Emerging market stocks statements are obfuscated and there is not much of oversight. It is definitely safe to invest via index funds route.

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  4. Good list there Geek. I do the same when I look for international exposure like Tom and Fully Franke mentioned above look for low cost ETFs. This will surely help.

    Also worth to note significant amount of revenue and profit is generated by a lot of US companies from overseas.

    Thanks.
    TDK.

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    Replies
    1. Yup. Almost 50% of the revenue of S&P 500 companies is from outside US.

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  5. Nice summary on international investing, I own VTIAX and seem like for the past year it's doing pretty good.

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