Vanguard Tax-Managed International Fund
From Bogleheads
| Company: | Vanguard |
|---|---|
| Fund category: | International Developed Markets |
| Benchmark: | MSCI EAFE Index |
| Start date: | 08/17/1999 |
| Expense ratio: | 0.15% |
The Vanguard Tax-Managed International Fund is the company's most tax-efficient international stock fund, presently tracking the MSCI EAFE Index. According to the fund's prospectus, this fund:
... purchases stocks included in the Morgan Stanley Capital International/(R)/ Europe, Australasia, Far East (MSCI/(R)/ EAFE/(R)/) Index,which is made up of approximately 1,211 common stocks of companies located in 21 countries in Europe, Australia, Asia, and the Far East. The Fund uses statistical methods to "sample" the Index, aiming to closely track its investment performance while limiting investments in Index securities that have undesirable tax characteristics in an attempt to minimize taxable income distributions.
The Fund Holdings page on the Vanguard website reports that as of 10/31/2008, the fund invests in 996 stocks, while the benchmark index includes 1,020.
Contents |
Share Classes
Two share classes are available to individual investors:
- Investor (VTMGX), with an expense ratio (ER) of 0.15%, an initial minimum investment of $10,000, and a 1% redemption fee on shares sold within five years of purchase.
- ETF (VEA) with an ER of 0.12% and no minimums, though transaction costs apply in buying and selling through a brokerage. This product is called the Europe Pacific ETF.
Total costs of the ETF and open-end classes may be compared via this Vanguard calculator.
An additional share class is offered to institutional investors:
- Institutional (VTMNX) with an ER of 0.09%, an initial minimum investment of $5,000,000, and a 1% redemption fee on shares sold within five years of purchase.
Advantages
Expense Ratio
The fund's expense ratios across all share classes (0.15%, 0.12%, and 0.09%) are rock bottom, especially when compared to the average international fund expense ratio of 1.65%.
Brokerage commission expense is the only quantified transaction cost reported by mutual funds. In fiscal year 2007, the fund paid $898,000 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]
| Tax-Managed International CR | Average Fund CR [1] |
| 0.037% | 0.127% |
[1]Vanguard International Growth Fund, Vanguard International Value Fund, Vanguard International Explorer Fund
Tax Efficiency
The fund has never distributed capital gains during its lifetime and has always provided 100% qualified dividend distributions. The fund also qualifies for the foreign tax credit. In addition, the ETF share class of the fund (as of 7/31/2008, 1.7 billion dollars in net assets of the 4.0 billion dollar total net asset base) will serve to improve the fund's fundamental tax attributes by removing low tax basis stock from the portfolio as institutional investors execute in-kind redemptions of ETF creation/redemption units.
Criticisms
Redemption Fee
The 1% VTMGX redemption fee (which is paid to the fund) during the first five years of investment makes it quite expensive to employ Tax Loss Harvesting during down markets.
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 MSCI EAFE 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 VTMGX shows 89% large cap, 11% mid cap and 0% small cap allocations, though such numbers are heavily dependent upon an information provider's exact size and style definitions.
Absence of Key Markets
The Tax-Managed International Fund does not include stocks from emerging markets, generally making it unsuitable as an exclusive foreign holding. It also omits Canadian equities.
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 VTMGX performance. Annualized results for periods ending 07/31/2008 are as follows:
| 1 year | 3 years | 5 years | |
| Vanguard Tax Managed International | -12.50% | 10.25% | 15.32% |
| MSCI EAFE | -12.19% | 10.50% | 15.36% |
The largest quarterly loss since inception for the fund (-20.00%) came in the 3rd quarter of 2002. The highest quarterly return (19.32%) occurred in the 2nd quarter of 2003.
VTMGX has been in existence for 8 full calendar years. During this 2000-2007 period, the fund had an average annualized return of 5.21%. Its best calendar year result was +38.67% (2003), and its worst was -21.94% (2001). Its tracking error relative to its benchmark varied from -0.50% (2001) to +0.32% (2002).
History
Inception dates of the various share classes are as follows:
- Investor: 08/17/1999
- Institutional: 01/04/2001
- ETF: 07/20/2007
The fund's fiscal year ends on 12/31 of each year.
Links
- Vanguard Tax-Managed Funds Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund.
- Vanguard Tax-Managed International 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%.
Vanguard reports that The aggregate amount of brokerage commissions paid by Vanguard Tax-Managed International Fund in the fiscal year ended December 31, 2007, was higher than amounts paid during the previous fiscal years primarily due to increased trading activity resulting from two factors: (1) large cash inflows into the Fund, and (2) a reconstitution of the Fund's benchmark index by the index provider.
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 | |
