Vanguard Total International Stock Index Fund
From Bogleheads
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| Company: | Vanguard |
|---|---|
| Fund category: | International Stock Index |
| Benchmark: | MSCI Total International Composite Index[1] |
| Start date: | 04/29/1996 |
| Expense ratio: | 0.27% |
| [1] Consists of the MSCI Europe Index, the MSCI Pacific Index, and the MSCI Emerging Markets Index. | |
The Vanguard Total International Stock Index Fund is a fund-of-funds, presently tracking the Total International Composite Index[1]. According to the fund's prospectus:
The Fund employs a “passive management”—or indexing—investment approach. The Fund seeks to track the performance of the Total International Composite Index by investing in three other Vanguard funds—Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund. These other funds seek to track the MSCI Europe Index, the MSCI Pacific Index, and the MSCI Emerging Markets Index, which together make up the Total International Composite Index. The Fund allocates all, or substantially all, of its assets among the European Stock Index Fund, the Pacific Stock Index Fund, and the Emerging Markets Stock Index Fund, based on the market capitalizations of European, Pacific, and emerging markets stocks in the Total International Composite Index.
The Fund Holdings page on the Vanguard website reports that as of 10/31/2008, the fund's composition is as follows:
| Underlying Fund | Allocation |
|---|---|
| Direct securities | 52.4% |
| Vanguard European Stock Index | 26.0% |
| Vanguard Pacific Stock Index | 12.8% |
| Vanguard Emerging Markets Stock Index | 8.8% |
[1] Consists of the MSCI Europe Index, the MSCI Pacific Index, and the MSCI Emerging Markets Index.
Contents |
Share Classes
There is only one share class available to investors:
- Investor Shares (VGTSX), with an expense ratio (ER) of 0.27%, and an initial minimum investment of $3,000, along with a 2% redemption fee on shares sold within two months of purchase.
Advantages
Broad Coverage
The Total International Index Fund holds a market-weighted basket of equities from most foreign developed markets and emerging markets. However, unlike Vanguard FTSE All-World ex-US Index Fund, it doesn't include Canadian stocks.
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 MSCI composite 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 VGTSX shows 88% large cap, 12% 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.
Foreign Tax Credit
Because VGTSX is a fund of funds, it has not, in the past, been eligible for the foreign tax credit (which would be worth about 0.15% annually had it been available), and thus it was generally preferable for taxable investors to hold an alternative index fund or combination of indexes. However, in August 2008, Vanguard announced that 50% of the portfolio would be directly invested in individual stocks, rather than in other funds. According to Vanguard, this means that, in time, the fund may have the ability to pass through foreign taxes paid on the directly held securities. See History below.
Vanguard FTSE All-World ex-US Index Fund is a single-fund alternative tracking a similar index. It is also possible to hold the three component funds separately, European Index, Pacific Index, and Emerging Markets Index, or for an even lower tax cost, Tax-Managed International and Vanguard Emerging Markets Stock Index Fund. All of the alternatives are also available as ETFs. See Slice and Dice International for more details.
Additional Considerations
Tax Efficiency
The Total International Stock Index Fund is tax-efficient enough for a taxable account, although the alternatives are slightly better. Because the Total International Stock Index Fund is a fund-of-funds, it is ineligible for the foreign tax credit, which is a small additional tax cost. This cost is large enough for new investors to prefer an alternative such as Vanguard FTSE All-World ex-US Index Fund, but not large enough to compensate for the tax cost of selling current holdings for a significant capital gain.
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 fund holds three underlying regional indexes, which have ETF classes and thus are even less likely to pass on capital gains, since when institutional investors redeem creation units for their constituent stocks, Vanguard uses the opportunity to dispose of low-basis lots. The fund does not need to rebalance the underlying indexes, and thus is unlikely to have significant sales on its own. 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 markets', is not unusually high. Further, most of the fund's income should be in the form of qualified dividends (QDI), currently taxable at a 15% rate or less. The fund's dividends were 74.31% qualified in 2007. The fund's dividends were slightly behind its main competitor Vanguard FTSE All-World ex-US Index Fund with a QDI of 87.23%.
Costs
VGTSX has an expense ratio of 0.27% and no purchase fee. The fund is indeed cheaper than the open-end share class of its relatively new competitor Vanguard FTSE All-World ex-US Index Fund, which currently has a 0.40% expense ratio. For other quick comparisons, check out Compare Vanguard International Funds.
Nevertheless, Vanguard could create even less costly variations on VGTSX. The three underlying holdings are presently all Investor Class, but they do have Admiral and Institutional share classes. An Admiral Class Total International Stock Index Fund would serve individual shareholders with substantial balances, whereas an Institutional Class version would serve workplace retirement plans. On the other hand, Vanguard incurs substantial costs in creating and maintaining funds-of-funds. These costs are not passed on directly to their shareholders, and the absence of additional share classes could be viewed as a sort of reimbursement.
It is possible for a Vanguard investor to approximate VGTSX using cheaper funds, but with a higher minimum investment. Using basic open-end choices, 80% Tax-Managed International Fund plus 20% Emerging Markets Stock Index Fund has an expense ratio of 0.19%; this would require an investment of $15,000 to meet the $3,000 minimum for Emerging Markets Stock Index Fund. (Note also that the Emerging Markets Stock Index Fund has 0.25% purchase and redemption fees.) Using exchange traded products, 80% Europe Pacific ETF plus 20% Emerging Markets ETF has an expense ratio of 0.15%, but with attendant transaction costs (brokerage commissions, bid/ask spreads, and premium/discounts.)
The semiannual report, dated 04/30/2008, reports that the expense ratio of the fund has dropped to 0.24%.
Performance
This historical returns webpage provides VGTSX performance. VGTSX has been in existence for 11 full calendar years. During this 1997-2007 period, the fund had an average annualized return of 8.47%. Its best calendar year result was +40.34% (2003), and its worst was -20.15% (2001). Its tracking error relative to its benchmark varied from -0.38% (2001) to +0.65% (1999).
History
The fund has an inception date of 04/29/1996.
The fund's fiscal year ends on 10/31 of each year.
On 10/24/2006, the MSCI Emerging Markets Index replaced the Select Emerging Markets Index in the fund's composite benchmark.
On 08/05/2008, the fund enabled itself to invest directly in European, Pacific, and emerging markets stocks, making it possible to pass through foreign tax credit to the shareholders. See Vanguard Total International Stock Index Fund modifies investment policies for details.
Links
- Vanguard International Index Fund Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund.
- Vanguard Total International Stock Index Fund accounting data
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 | |
