Vanguard FTSE All-World ex-US Index Fund
From Bogleheads
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| Company: | Vanguard |
|---|---|
| Fund category: | International Stock Index |
| Benchmark: | FTSE All-World ex-US |
| Start date: | 03/02/2007 |
| Expense ratio: | 0.40% |
The Vanguard FTSE All-World ex-US Index Fund is the company's most widely diversified international stock fund, presently tracking the FTSE All-World ex US Index. According to the fund's prospectus,
The Fund employs a "passive management" --or indexing--investment approach designed to track the performance of the FTSE/(R)/ All-World ex US Index, a free-float-adjusted, market-capitalization-weighted index designed to measure equity market performance of international markets. The Index includes approximately 2,200 stocks of companies located in 46 countries, including both developed and emerging markets. As of October 31, 2007, the United Kingdom, Japan, France, Germany, Australia, and Switzerland made up approximately 17%, 14%, 8%, 7%, 5%, and 5%, respectively, of the Index's market capitalization. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.
The Fund Holdings page on the Vanguard website reports that as of 10/31/2008, the fund invests in 2,205 stocks, while the benchmark index includes 2,217.
Contents |
Share Classes
Two share classes are available to individual investors:
- Investor (VFWIX), with an expense ratio (ER) of 0.40%, an initial minimum investment of $3,000, along with a 2% redemption fee on shares sold within two months of purchase.
- ETF (VEU) with an ER of 0.25% and no minimums, 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, although the differential in Vanguard's charges will likely steer most investors toward VEU. This fund is one of the few Vanguard funds which have more assets in ETF shares than in traditional open-end mutual fund shares. As of May 31, 2008, approximately 74% of the fund assets were invested in the ETF shares.
An additional share class is offered through some workplace retirement plans:
- Institutional (VFWSX) with an ER of 0.15%
Advantages
Broad Coverage
The FTSE All-World ex-US Index Fund holds equities from all foreign developed markets and most emerging markets. The fund is unique among Vanguard's indexed offerings in its inclusion of Canadian stocks.
Tax Efficiency
The FTSE All-World ex-US Index Fund is quite tax-efficient, making it a suitable holding for a taxable account. Because the fund holds a capitalization-weighted portfolio from essentially all foreign markets, successful stocks almost never leave its benchmark index, so the fund doesn't generally realize capital gains by selling securities. The existence of an ETF share class is also helpful in this regard, since when institutional investors redeem creation units for their constituent stocks, Vanguard uses the opportunity to dispose of low-basis lots. About the only scenario under which the fund could realize large capital gains is massive shareholder redemptions, unlikely in the absence of an unprecedented market crash (which would in itself solve the capital gains problem).
The fund's dividend yield, being in line with the world ex-US markets', is not unusually high. Further, most of the fund's income should be in the form of qualified dividends, currently taxable at a 15% rate or less. The fund's dividends were 87.23% qualified in 2007. This figure slightly surpasses the 74.31% number achieved by the Vanguard Total International Stock Index Fund, the subject fund's main competitor within Vanguard.
Eligibility for the foreign tax credit is also an advantage that the FTSE All-World ex-US Index has over the Total International Stock Index for taxable investors. The former offering invests directly in stocks, so it is eligible for the credit. The latter is a fund-of-funds, which makes it ineligible for the credit. One caveat: Currently, this advantage is not fully realized due to the offsetting effects of the higher expense ratio of the FTSE All-World ex-US Index fund.
Criticisms
Size and Style
Academic research indicates that small and small value stocks have provided significant diversification effects compared to other international equity categories in the past. The FTSE 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 VFWIX 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.
Relatively High Costs
Expense Ratio
The current 0.40% expense ratio of VFWIX is high by Vanguard standards. For example, the following open-end fund holdings approximate VFWIX roughly with lower expense ratios:
- 100% Total International Stock Index Fund: Expense ratio = 0.27%
- 80% Tax-Managed International Fund plus 20% Emerging Markets Stock Index Fund Investor Shares: Expense ratio = 0.19%
VEU's current 0.25% expense ratio is also comparatively high. Using Vanguard's own exchange traded products, an investor may obtain a rough VEU proxy through 80% Europe Pacific ETF and 20% Emerging Markets ETF, with an effective expense ratio of 0.15%.
Given the newness of the FTSE All-World ex-US Index Fund, it is likely that its asset base will grow substantially over the years, lowering its expenses. The semiannual report, dated 04/30/2008, reports that the expense ratios for Investor Shares and ETF Shares have dropped to 0.36% and 0.21%, respectively.
Brokerage Transaction Expense
Brokerage commission expense is the only quantified transaction cost reported by mutual funds. In fiscal year 2007, the fund paid $485,000 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. As a new fund, the FTSE index fund has a rather high CR as a function of its relatively low net asset base. The CR will decline as net assets increase.[1]
| FTSE All World ex US Index CR | Average Fund CR [1] |
| 0.262% | 0.127% |
[1]Vanguard International Growth Fund, Vanguard International Value Fund, Vanguard International Explorer Fund
Performance
This historical returns webpage provides VFWIX performance.
History
Inception dates of the various share classes are as follows:
- ETF: 03/02/2007
- Investor: 03/08/2007
- Institutional: 04/30/2007
The fund's fiscal year ends on 10/31 of each year.
The fund eliminated its 0.25% purchase fee on 06/26/2008.
Links
- Vanguard International Index Fund Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund.
- Vanguard FTSE All-World ex-US Index Fund accounting data
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 international stock funds was 0.222% in 2003, with a range of expense between 0.00% and 4.796%.
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 | |
