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