Vanguard Total International ETF - The New Champ

Last Updated Jan 31, 2011 9:49 PM EST

On Friday, January 28th, the Vanguard Total International Stock Index ETF (VXUS) began trading. This new international ETF is now my international equity ETF of choice, for a few reasons:
  • It's easily the broadest international ETF owning more than 6,000 securities over 44 countries, following the MSCI All Country World Ex USA Investable Market Index.
  • With an expense ratio of 0.20% annually, it's the lowest cost international ETF around.
  • With $51.4 billion in assets from other share classes, it's large enough to minimize tracking error from sampling and replicates the entire index.
History of International Indexing
International indexing has been around for quite some time. The first funds were known as EAFE funds, such as the Fidelity International Index Fund (FSIIX), and included only Europe, Australia, and the Far East. Missing were the emerging market countries, Canada, and small cap companies from every country. Next came funds like the Vanguard Total International Index Fund (VGTSX), which included the emerging market countries, excluding Canada, which represents about seven percent of the international stock market.

Then, in March 2007, The Vanguard FTSE All World Ex-Us (VEU) ETF launched a third generation international fund that gave access to Canada. Only small cap stocks were missing from this index. Finally, in September of last year, Vanguard announced it was taking their second generation index fund and transitioning to a new index that would include the missing small cap element. Thus, the old second generation fund becomes the new fourth generation fund.


Why it took so long
It took well over four months for Vanguard to launch the ETF version of this fund. That's because buying more than 4,300 small cap stocks is no easy feat for a $50 billion dollar fund. Buying them all at once would have driven up the price of these shares. Thus, to protect current holders of their mutual fund class share, Vanguard took their time in converting to the new index.

My take on this fund
With most new ETFs merely offering a different spin on active investing, it's great to see one launched going in the opposite direction. The VXUS is definitely an upgrade, and becomes the international equivalent of the Vanguard Total Stock Index (VTI).

Rarely in investing do we have the opportunity to get more in a product, yet pay less for it. With VXUS, investors will get more diversification with lower costs. And because it already has $51.4 billion in assets, we don't have to wait until it becomes large enough to get the benefits of scale.

The Admiral class mutual fund (VTIAX), and the ETF (VXUS) are now my fund of choice for international investing. The only reason to stay in an earlier generation international fund would be that making the change would result in an unacceptable tax consequence.

Let's hear it for the new generation!

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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