Vanguard European Stock Index Fund
From Bogleheads
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| Company: | Vanguard |
|---|---|
| Fund category: | International Regional: Europe |
| Benchmark: | MSCI Europe Index |
| Start date: | 06/18/1990 |
| Expense ratio: | 0.22% |
The Vanguard European Stock Index Fund is a market-weighted vehicle, presently tracking the MSCI Europe Index. From its prospectus:
The Fund employs a “passive management”—or indexing—investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International® (MSCI®) Europe Index. The MSCI Europe Index is made up of approximately 579 common stocks of companies located in 16 European countries—mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 33%, 15%, 12%, and 9%, respectively, of the Index’s market capitalization, as of October 31, 2007). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden.
The Fund Holdings page on the Vanguard website reports that as of 11/30/2008, the fund invests in 523 stocks, while the benchmark index includes 494.
Contents |
Share Classes
There are three share classes available to individual investors:
- Investor (VEURX), with an expense ratio (ER) of 0.22% and an initial minimum investment of $3,000, along with a 2% redemption fee on shares sold within two months of purchase
- Admiral (VEUSX), with an ER of 0.12% 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 a 2% redemption fee on shares sold within two months of purchase
- ETF (VGK), with an ER of 0.12%, 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 (VESSX), with an ER of 0.12% and a 2% redemption fee on shares sold within two months of purchase
- Institutional (VESIX), with an ER of 0.09% and a 2% redemption fee on shares sold within two months of purchase
Advantages
Expense Ratio
The Vanguard European Stock Index Fund offers very low-cost access to European stocks.[1] The fund expense ratio and the average European Regional Fund expense ratio are given in the table below:
| Share Class | Expense Ratio | Average Fund ER |
| Investor Shares | 0.22% | 1.44% |
| Admiral Shares | 0.12% | 1.44% |
| ETF Shares [1] | 0.12% | 0.60% |
| Signal Shares | 0.12% | 1.44% |
| Institutional Shares | 0.09% | 1.44% |
[1] BGI iShares Europe 350 Index is the comparative ETF
Brokerage commission expense is the only quantified transaction cost reported by mutual funds. In fiscal year 2007, the fund paid $5,376,000 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.[2]
| Europe Index CR | Average Fund CR [1] |
| 0.017% | 0.127% |
[1] Vanguard International Growth Fund, Vanguard International Value Fund, Vanguard International Explorer Fund
Tax Efficiency
The Vanguard European Stock Index Fund has a history of being very tax-efficient. The fund realized modest distributable capital gains distributions during Fiscal Years 1994-2000 but has not distributed a capital gain since then. [See Vanguard European Stock Index Fund Tax Distributions for more complete data.] The fund's future capacity to remain tax efficient will be aided by the following three factors:
- The fund's single digit turnover ratio;
- The fund's volatility, which is sufficiently high to allow the fund to occasionally harvest realized losses and create loss carryforwards to offset future realized gains;
- The fund's ETF share class which should, over time, increase the fundamental tax efficiency of the fund by flushing low basis stock from the portfolio. At present, the ETF has received strong inflows of share creation and modest in-kind redemption.
The fund is eligible for the foreign tax credit.
The fund's dividends were 82.29% qualified in 2007.
At the close of the 2008 fiscal year, the fund had realized a $592,550,000 loss for the year, thereby increasing the fund's loss carryforwards, which can be used to offset future realized gains, to $370,782,000. The severe market downturn in 2008 left the fund with net unrealized losses of $7,751,252,000 as of the close of the fiscal year (10/31/2008).
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 Europe Index is limited to large and mid cap international stocks, and provides no asset class exposure to small cap international stocks. Applying Morningstar Instant X-Ray to VEURX shows 90% large cap, 10% mid cap and 0% 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.
Performance
This historical returns webpage provides VEURX performance for each of the last 16 calendar years. During this 1993-2008 period the fund produced its best calendar year result (+38.70%) in 2003, and its worst (-44.73%) in 2008. Since its 1990 inception, the fund has produced a +6.81% annualized return; this compares to a +6.73% benchmark return for the period. The fund's tracking error relative to its benchmark has varied from -0.84% (1994) to +0.73% (1999). In 2008 the fund provided a tracking error of +0.49% (net of +1.20% Fair Value Pricing) above the -46.42% benchmark index return.
Vanguard Institutional reports updated three year standard deviations of monthly returns. This measure of return volatility shows the fund had a 20.04% standard deviation compared to the 20.28% standard deviation of the benchmark as of 11/31/08.
History
Inception dates of the various share classes are as follows:
- Investor: 06/18/1990
- Institutional: 05/15/2000
- Admiral: 08/13/2001
- ETF: 03/04/2005
- Signal: 10/06/2006
The fund's fiscal year ends on 10/31 of each year.
Links
- International Index Fund Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund.
- Vanguard European Stock Fund Accounting Data
Notes
- [1] See Vanguard European Stock Index Fund Expenses for a history of fund expense ratios.
- [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 European stock funds was 0.189% in 2003, with a range of expense between 0.00% and 5.463%.
See also
