Vanguard Emerging Markets Stock Index Fund
From Bogleheads
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| Company: | Vanguard |
|---|---|
| Fund category: | International Regional: Emerging Markets |
| Benchmark: | MSCI Emerging Markets Index |
| Start date: | 05/04/1994 |
| Expense ratio: | 0.37% |
The Vanguard Emerging Markets Stock Index Fund is a market-weighted vehicle, presently tracking the MSCI Emerging Markets Index. From its prospectus:
The Fund employs a “passive management”—or indexing—investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 826 common stocks of companies located in emerging markets around the world. As of October 31, 2007, the largest markets covered in the Index were China, South Korea, Brazil, Taiwan, and Russia (which made up 17%, 15%, 12%, 11%, and 9%, respectively, of the Index’s market capitalization).
The Fund Holdings page on the Vanguard website reports that as of 10/31/2008, the fund invests in 830 stocks, while the benchmark index includes 781.
Contents |
Share Classes
There are three share classes available to individual investors:
- Investor (VEIEX), with an expense ratio (ER) of 0.37% and an initial minimum investment of $3,000, along with 0.25% purchase and redemption fees on all shares
- Admiral (VEMAX), with an ER of 0.25% and an initial minimum investment of $100,000, except $50,000 suffices for conversion of an Investor Shares account in existence 10 years, along with 0.25% purchase and redemption fees on all shares
- ETF (VWO), with an ER of 0.25% and no purchase or redemption fees, though transaction costs apply in buying and selling through a brokerage
Total costs of the ETF and open-end classes may be compared via this Vanguard calculator.
Two additional share classes are offered through some workplace retirement plans:
- Signal (VERSX), with an ER of 0.25%, and 0.25% purchase and redemption fees on all shares
- Institutional (VEMIX), with an ER of 0.20%, and 0.25% purchase and redemption fees on all shares
Advantages
The Vanguard Emerging Markets Stock Index Fund offers very low cost access to Emerging Market stocks. The table below compares the fund's rock bottom expense ratios with the average Emerging Market Fund.
Expense Ratio
| Share Class | Expense Ratio | Average Fund ER |
| Investor Shares [1] | 0.37% | 1.88% |
| Admiral Shares [1] | 0.25% | 1.88% |
| ETF Shares [2] | 0.25% | 0.74% |
| Signal Shares [1] | 0.25% | 1.88% |
| Institutional Shares [1] | 0.20% | 1.88% |
[1]A 0.25% transaction fee, paid to the fund, applies to all purchases and sales of fund shares. [2] BGI iShares MSCI Emerging Market Stock Index ETF is the benchmark comparison.
The semiannual report, dated 04/30/2008, reports that the expense ratios for Investor Shares, Admiral Shares, and ETF Shares have dropped to 0.33%, 0.21%, and 0.21%, respectively. Signal Shares are reported to have dropped to 0.21%, with Institutional Shares now priced at 0.16%.
Brokerage commission expense is the only quantified transaction cost reported by mutual funds. In fiscal year 2007, the fund paid $8,499,000 in brokerage commissions. We can compute a Commission Ratio (CR), analogous to the expense ratio, to express the frictional cost of brokerage. The following table provides the fund's CR, along with the average CR of Vanguard's active international funds. As a general rule, passive funds have lower transactional costs than do active funds.1
| Emerging Market Index CR | Average Fund CR [1] |
| 0.050% | 0.127% |
[1]Vanguard International Growth Fund, Vanguard International Value Fund, Vanguard International Explorer Fund
Criticisms
Size and Style
Academic research indicates that, in the past, small and small value stocks have provided significant diversification effects compared to other international equity categories. The MSCI Emerging Markets Index is essentially limited to large and mid cap international stocks, and provides virtually no asset class exposure to small cap international stocks. Applying Morningstar Instant X-Ray to VEIEX shows 81% large cap, 18% mid cap and 1% small cap allocations, though such numbers are heavily dependent upon an information provider's exact size and style definitions.
Bubble Risk
If a group of stocks becomes irrationally popular, their market capitalizations increase, so they are more heavily emphasized in any market-weighted fund. This effect, which depends upon the belief that stock sectors or even whole nations' markets can become significantly mispriced, may lead to sharp fund declines when the bubble bursts, i.e., the overvaluation unwinds itself. An obvious example, with benefit of hindsight, is the global technology boom of the late 1990s followed by the 2000-2002 bust.
Fees
The purchase and redemption fees are nonexpiring, and thus discourage trading by imposing a 0.25% round-trip cost on every trade. Given the volatility of emerging markets, there are many opportunities for tax loss harvesting, but the 0.25% cost significantly reduces the benefit.
The purchase and redemption fees can be avoided by using the ETF class; there are still brokerage fees and trading costs, but the fees can be less than 0.25%. This is the Vanguard fund for which the ETF class is most attractive, and should be considered even by investors who are eligible for Admiral shares; the Admiral shares have the same expense ratio as the ETF shares but still have the purchase and redemption fees.
Other Considerations
Tax Efficiency
The Vanguard Emerging Markets Stock Index Fund has been very tax efficient during its fifteen year history. After distributing a small capital gain during its first fiscal year, the fund has not distributed a taxable gain for fourteen years. Additional tax factors:
- The fund qualifies for the foreign tax credit.
- The fund's dividends were 59.93% qualified in 2007.
The fund faces the risk of realizing a taxable distribution if countries migrate out of the index. For example, if a fairly advanced emerging market nation (e.g. South Korea) leaves the index to join the developed markets, the fund is forced to sell stocks from that country and may be forced to distribute capital gains to shareholders. This risk can be reduced or mitigated by the following factors:
- Emerging Market stocks are volatile; down markets present the fund with opportunities to harvest losses and add them to the fund's loss carryforward, which can then be used to offset future realized gains.
- The low expense ratio of the fund's ETF shares has resulted in the ETF attaining a healthy share of fund assets (29.22% as of 07/31/2008). Although the ETF has experienced high levels of share creation, future in-kind redemptions will allow the fund to remove low basis stock from the fund portfolio.
Performance
This historical returns webpage provides VEIEX performance for each of the 13 full calendar years of its existence. During this 1995-2007 period, the fund had an average annualized return of 11.12%. Its best calendar year result was +61.57% (1999), and its worst was -27.56% (2000). Its tracking error relative to its benchmark varied from -1.16% (2003) to +0.69% (1999).
History
Inception dates of the various share classes are as follows:
- Investor: 05/04/1994
- Institutional: 6/22/2000
- Admiral: 06/23/2006
- ETF: 03/04/2005
- Signal: 01/19/2007
The fund's fiscal year ends on 10/31 of each year.
The fund made a minor change of benchmark on 08/23/2006, moving from the Select Emerging Markets Index, which was administered exclusively for Vanguard by MSCI, to the MSCI Emerging Markets Index.
The fund reduced the purchase and redemption transaction fee from 1% to 0.5% on 04/01/2000.
The fund reduced the purchase and redemption transaction fee from 0.5% to 0.25% on 06/26/2008.
The fund has steadily reduced its expense ratio over time as its asset base increased. See Vanguard Emerging Market Expense Ratios for details.
Links
- Vanguard International Index Fund Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund.
- Vanguard Emerging Markets Stock Index Fund accounting data
- MSCI Barra Announces its Conclusions from its Recent Market Classification Study, dated 06/18/2008.
Notes
[1]Comparative benchmarks for brokerage commission expense are not readily available. In a 2004 ZAG commissioned study, "Portfolio Transactions Costs at U.S. Equity Mutual Funds" authors Jason Karceski, Miles Livingston, and Edward S. O'Neal, found that in 2002, international funds paid an average commission of 0.456%; emerging market funds paid 0.609%. The weighted dollar commissions (what investors actually held) produced a weighted commission of 0.259% for international funds, and 0.399% for emerging market funds.
Lipper, in a 2004 study, Mutual Fund Trading and Portfolio Transaction Costs, found that the average weighted commission paid by emerging market stock funds was 0.304% in 2003, with a range of expense between 0.00% and 2.534%.
See also
| International Stocks | ||
|---|---|---|
| International Stocks | Domestic/International • Slice and Dice International • International Small-Cap • S&P/Citibank Global Broad Market Index • Foreign tax credit | |
| Comparing Vanguard International Funds | FAQ on Vanguard International Funds • Compare Vanguard International Funds • Vanguard SEC Filings: International & Global Stock Funds | |
| Vanguard International Funds | FTSE All-World Index • FTSE All-World ex-US Index • Total International Stock Index • Tax-Managed International • European Stock Index • Pacific Stock Index • Emerging Markets Stock Index • International Value • International Growth • International Explorer | |
| Vanguard International Fund Distributions | Vanguard International Growth Fund Tax Distributions • Vanguard International Value Fund Tax Distributions | |
| Vanguard International Fund Expenses | Vanguard European Stock Index Fund Expenses • Vanguard Pacific Stock Index Fund Expenses • Vanguard Emerging Market Expense Ratios | |
