Under the Hood: Vanguard Total International Stock (VXUS)

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The fund: Vanguard Total International Stock ETF (Nasdaq: VXUS)

The index: The ETF tracks the MSCI All Country World ex-USA Investable Market Index, which includes virtually every country with a significant stock market, except the United States. This covers 44 developed and emerging markets in Europe, Asia, South America and Africa, as well as Canada.

What sets this index apart from other all-world benchmarks is that it includes small-cap stocks as well as large and mid-cap stocks. As a result, it’s made up of an astounding 6,435 companies. If there is a larger equity index in the world, I’m not aware of it.

The cost: The fund’s MER is 0.20%.

The details: This ETF was designed as one-stop shopping for US investors who want to hold international equities in their portfolio. The rough country breakdown is 43% developed markets in Europe, 25% developed Pacific markets (mostly Japan and Australia), 25% emerging markets, and 7% Canada. The fund includes 54% large-cap stocks, 33% mid-cap stocks, and 13% small caps.

VXUS was just launched on January 28, and I normally take a wait-and-see approach with new products. It often takes time for an ETF to acquire all of the stocks in its index and, as a result, many resort to representative sampling, which can lead to large tracking errors. But there’s no need to worry about that with this ETF, because it is simply a new share class of the Vanguard Total International Stock Index Fund, a mutual fund that has been around for 12 years and has $51 billion in assets.

Last fall, this mutual fund switched its benchmark to the MSCI index, and then the managers set about gradually buying up the 4,000-plus small-cap stocks it needed to fully replicate it. That took about four months. When the acquisitions were complete, Vanguard launched the ETF version. So this fund hit the ground running.

Over the last 10 years, the mutual fund’s tracking error has amounted to a mere 0.09% annually, and since its inception in 1999, the fund has returned 5.15%, three basis points more than its benchmark index. That is a exemplary track record for an index fund.

The alternatives: There are a number of other ETFs that cover the entire world outside of the US. Vanguard’s own FTSE All-World ex-US ETF (VEU) is one of them: it has an almost identical country allocation, but it holds only large- and mid-cap companies. VEU has 2,858 stocks and a fee 0.25%. To get most of the small-cap component, you would have to add the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS), which has 2,700 holdings and MER 0.40%.

The iShares MSCI ACWI ex-US Index Fund (ACWX) also has the same country breakdown, but it includes only 834 holdings and has an MER of 0.35%.

State Street Global Advisors offers the SPDR MSCI ACWI ex-US ETF (CWI), which tracks the same index as its iShares competitor, but holds a larger sample of 1,800 stocks (its MER is 0.34%). Incidentally, it may also be the only exchange-traded fund on the planet whose name is made up entirely of acronyms.

Bottom line: VXUS may be the most important new ETF to come along in the last couple of years: it’s a significant improvement over every competitor. Not only has Vanguard combined VEU and VSS into to single fund, it’s gone two steps further by adding hundreds more small-cap stocks and lowering the management fee.

In my opinion, VXUS is now the best international equity ETF on the market, and the only one most Canadian investors will ever need. As a result, I’ve decided to make it a core holding in my Complete Couch Potato portfolio, where it replaces Vanguard’s VEA, which holds European and Pacific stocks, and VWO, which covers emerging markets. (Because VXUS holds 7% in Canadian stocks, it’s not a perfect substitute, but the difference is trivial.) This reduces the complexity of the portfolio and adds more diversification through the small-caps, with essentially no change in the cost. What’s not to love?

Disclosure: I hold VXUS in my own portfolio.

62 Responses to Under the Hood: Vanguard Total International Stock (VXUS)

  1. reggie March 17, 2012 at 2:25 pm #

    Great site!

    As dividends from VXUS will be considered foreign income they do not receive favorable tax treatment…so you suggest holding them in an RRSP account. Since this ETF is traded in USD how can you do that? I did not think it was possible to hold USD in an RRSP? Also, is it possible to hold USD in a TFSA?

  2. Canadian Couch Potato March 17, 2012 at 2:35 pm #

    @Reggie: Welcome to the site. Several brokerages do allow you to hold US dollars in an RRSP and a few even in TFSAs. However, even if your brokerage does not allow you to hold US cash, you can always by US-listed securities. Unfortunately, the brokerages will charge you to convert the currency from Canadian to US dollars.

    Some posts you may find interesting:
    http://canadiancouchpotato.com/2010/11/29/holding-us-dollars-in-registered-accounts/
    http://canadiancouchpotato.com/2010/10/19/reducing-the-cost-of-currency-exchange/
    http://canadiancouchpotato.com/2011/07/21/review-scotia-itrades-us-friendly-rrsp/
    http://canadiancouchpotato.com/2012/02/27/a-new-way-to-sidestep-currency-conversion-costs/

  3. Craig January 18, 2013 at 1:38 pm #

    For those people who have their accounts with TD Waterhouse; can you compare VXUS to the TD’s e-Series fund TDB911? Is there a benefit to going with TDB911 as opposed to VXUS? Their performance seems to be about the same, although TDB911 has a higher MER and lower Distribution, however, I believe you get fractional shares with TDB911 when re-investing the distribution. I’m got a bit of Analysis Paralysis on this question.

    thanks,

  4. Canadian Couch Potato January 18, 2013 at 2:01 pm #

    @Craig: I hate to add to the confusion, but there are more important considerations than the size of the distributions:

    - VXUS holds emerging markets as well as developed markets. Are you comfortable with this?
    - VXUS trades in US dollars, so you will have to convert your Canadian currency to buy it, which can be expensive
    - VXUS will cost you $10 per trade while the TD e-Series is commission-free: how often do you plan to contribute?

    If you’re unsure, it’s safest to use the e-Series option for now until you figure out the larger issues.

  5. Rob March 20, 2013 at 9:06 am #

    Is there a Canadian equivalent ETF/Fund to the VXUS to avoid the exchange rate costs?

  6. Canadian Couch Potato March 20, 2013 at 9:15 am #

    @Rob: No, unfortunately. There isn’t even in a good ETF tracking international developed markets with no currency hedging, which is a huge gap in the marketplace.

  7. Alon January 24, 2014 at 12:40 pm #

    Great blog!

    I have a question about VXUS/VTI. I have both of these ETFs as pillars of my RRSP. When I bought them in 2013, I used Norbert’s Gambit (using DLR) to convert CDN$ to USD$ at Questrade. It was reasoanbly easy and worked well. I was converting six figure amounts.

    It’s now time to re-balance and add money to my RRSP. Let’s say for example I want to add $4000 in units to VXUS. Questrade charges 1.99% to convert currency. How would you handle this:

    1. Accept the 1.99% conversion charge and buy VXUS
    2. Do a Norbert’s Gambit (most folks say it’s just not worth the trouble at this low dollar level)
    3. buy units of XEF:XEC in 4:1 ratio and save the cost of currency conversion

    Look forward to your response.

    Best,
    Alon

  8. Oldie February 12, 2014 at 12:29 pm #

    @Alon: I think to get the attention of CCP you should specifically direct the comment to him — he’s not likely going to be reviewing every 3 year old blog looking for questions from them. (I’m also interested in the answer to 3, but for different reasons than the cost. FWIW, my opinion on 2. is that Norbert’s Gambit with DLR is not really a bother at all, and will cost you $8 plus 2 trades; oh, the buy trade on Questrade is free, isn’t it? Looks like the 1.99% Questrade conversion cost would be $80. I would do NG, but I’m cheap. Your choice.)

  9. sleepydoc February 17, 2014 at 5:18 pm #

    Hi. I had allocated about 25% of my international holding to emerging markets and was holding VEA 75% and VWO 25%. I had thought at the time of your VXUS post that it would also hold 25% emerging markets, so rolled the two funds into one. I think I read in another recent post of yours that VXUS now holds 17% emerging markets.

    Is this true? Do the holdings in the FTSE Global All Cap ex US Index vary according to their weight in the world? ie: will the % of emergency markets decrease as they perform poorly? If so, isn’t this the opposite of what a long term holder would want – to purchase more of the sector that is performing poorly?

  10. Canadian Couch Potato February 17, 2014 at 8:25 pm #

    @sleepydoc: Yes, the allocations on VXUS are based on global market capitalization: there is no specific target and no overbalancing within the fund. Over the last couple of years, emerging markets have dramatically underperformed developed markets, so the allocation to emerging markets in VXUS is now much lower than it was.

    Someone else recently asked me whether it would make sense to instead hold two separate funds for emerging and developed markets, and to rebalance back to a specific target occasionally. I’d say, sure, that’s completely reasonable if you want to go that route. But overall it’s not likely to make a significant difference one way or the other.

    Remember, this is no different from any other total-market index: for example, if you hold a fund like VCN or VTI, there is no attempt to sell individual stocks that have gone up and buy more of what is down.

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