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.
Thanks for pointing this one out CCP. We hold VEA and VWO (based on our readings here) but I can see why buying this ETF makes a ton of sense. It does have a slightly higher MER however. What are your thoughts on that?
@Sustainable PF: There’s certainly no rush to switch, given that it would involve three trades (two sales and a purchase) and tax implications in a non-registered account. But next time you’re rebalancing or adding money, it’s worth considering.
The difference in MER is trivial. VEA’s fee is 0.15% and VWO’s is 0.27%. Assuming that you currently hold three times as much VEA, the combined MER of your international component is 0.18%. So the additional cost is 2 basis points in exchange for thousands of small-cap stocks and a single fund that never needs to be rebalanced.
For some reasons I think VWO was 0.05% – must have misread (or was paying attention to the allocation and not the MER).
We don’t actually hold VWO atm, just VEA so it will be 2 trades for us. We actually hold our VEA in our RRSP right now. Thanks for the feedback!
Is this International ETF best held inside or outside an RRSP?
What the tax consequences of holding a US ETF that holds Canadian stocks? I find it “more neat” if I can hold a single Canadian Equity ETF, that way I can fine tune the amount of home bias.
Could this replace VEA, EFV, VSS and VWO in the “Über–Tuber” model portfolio?
@Michael: International dividends are fully taxed as income and subject to withholding when held outside an RRSP, so it would usually be best to shelter this fund.
@Slacker: You won’t be eligible for any dividend tax credit on the Canadian component. I understand the desire to keep things neat, but put it in perspective. If you had a 15% allocation to VXUS, the Canadian portion would make up 1% of your portfolio. It’s negligible.
@Mike D: It could, but the additional allocation to EFV and VSS gives the Uber-Tuber more of a tilt to value and small-cap.
I’m a bit confused….. this is a substitute for VEU, yet you’re using it to replace VEA and VWO ? I get the feeling I’m missing something. I always thought VEU was to be avoided because of its Canadian content (which most people on here want to get directly). Otherwise, why was VEA just about always the most popular choice ?
Also, what type of ratio between VTI and VXUS would be “typical” ? Given that a typical asset allocation was along the lines of 3 VTI-3VEA-1VWO, would this mean now we should look at 3VTI-4VXUS ?
I’m getting the feeling that this is a neat ETF for simple portofolios, but it also means asset allocation outside of Canada and USA won’t be under my control – impossible to overweigh small caps, value stocks or emerging markets, for example.
Hi Dan – I noticed you’re replacing VT in the “simpler version” of the Complete Couch Potato you blogged about in early January with a combo of this fund (VXUS) and VTI to get US exposure.
Will you explain your thinking – when complete couch potato people rebalance, would you suggest replacing VT with VXUS/VTI combo?
Thanks as always for an informative and well-written post.
@Paul and Kristi: First let me say that switching any Vanguard funds you currently have in your portfolio would only result in very small differences. There is absolutely no need to make any changes now. I’m just trying to streamline things for people going forward, perhaps at your next rebalancing period, when you’ll be making trades anyway.
@Paul: Both VXUS and VEU have 93% of their holdings in the same countries as VEA and VWO. If you had 15% of your portfolio in VEA and 5% in VWO, you could replace this with a 20% allocation to VXUS to make things simpler, more diversified and only about two basis points more in MER, which is negligible.
The fact that VXUS has a 7% allocation to Canada is pretty meaningless. If you hold VXUS as 15% or 20% of your portfolio, the Canadian slice represents barely 1% of your overall allocation. The benefits of VXUS far outweigh this quibble.
You’re right that if you want to overweight small-cap, value or emerging countries, it doesn’t make sense to use VXUS, because it doesn’t overweight anything. It;s a plain vanilla cap-weighted fund. That’s why I didn’t incorporate it in the Uber-Tuber.
@Kristi: Replacing VT with a combination of VXUS and VTI would give you more diversification (via thousands of small-cap stocks) and a lower MER. The trade-off is that you’re managing two funds instead of one. In general, I’d stick to one fund for a small account, but would split as your account is larger. But again, these are small details: both are excellent choices.
Hope that helps clarify.
I wonder how the breakdowns were decided upon in the index. If you were to not count the U.S., would the Canadian economy count for 7% of the world?
@OpenSource: Yes, exactly. The allocations are determined by the size of each country’s total market capitalization. Canada is about 4% overall, while the US is more than 40%.
I’m a relatively recent (and increasingly evangelical) convert to the Couch Potato portfolio, and I am a big fan of Vanguard funds. I hold VTI and VWO, but my international equity holdings are in the Altamira International Currency Neutral Index Fund (same MER as XIN but no transaction costs) because I haven’t been able to bring myself to hold 60% of my portfolio in US currency.
Is there any rule of thumb for what a reasonable currency balance is, or is it simply whatever I’m comfortable with?
Love the blog!
@Chris: Glad you’re enjoying the blog. It’s a very common misunderstanding that funds like VEA and VWO expose Canadians to the US dollar. In fact, the securities in these funds are denominated in euros, pounds, yen and Australian dollars, and a basket of others, and the only exposure is to these currencies. See this post from Canadian Financial DIY for more info:
http://canadianfinancialdiy.blogspot.com/2007/05/clarification-of-foreign-exchange-risk.html
I think holding a third of your portfolio in unhedged foreign ETFs is just fine. It even adds a diversification benefit that you can take advantage of when you rebalance. If you have a large portfolio, you could elect to hedge half of the foreign currency and leave the other half unhedged:
https://canadiancouchpotato.com/2010/11/01/the-50-percent-solution/
Let me second Kristi and Chris on complimenting you about this blog, your well-written posts and quick responses are terrific. Thanks again !
I tried to trade VXUS last Friday and was unable to in my BMO Investorline accounts (RSP and non RSP). Waiting for response from BMOIL. Have others been able to trade with there canadian brokerage account?
@Kjab: Thanks for pointing this out. I neglected to mention that VXUS is traded on the Nasdaq, not on the New York Stock Exchange like most other Vanguard ETFs. Please let me know if you’re still unable to get it through BMO.
Slightly off topic. Funny how almost all Vanguard low cost ETFs also have an underlying Vanguard low cost mutual fund. This is very depressing for those of us in Canada that would prefer the ease of mutual fund investing (easy dollar cost averaging and easy dividend reinvestment) but are stuck with ETF portfolios because there is no real broad selection of low cost indexed mutual funds in Canada.
@Greg: It’s true that it would be amazing to have a company like Vanguard in Canada to take a run at the ridiculously overpriced index mutual funds here. But I look on the bright side: when Vanguard started launching ETF versions of their funds several years ago, it finally allowed Canadians to get access to excellent products that had previously been be off limits — and the ETFs are even cheaper than the underlying funds.
@CCP: Why are the fees in Canada for both mutual funds and ETFs so high compared to the US? And, why is there no really broad-based ETF for Canadian stocks? I laugh when I look at the 250 stocks of XIC compared to the 3K plus stocks on VTI.
The TSX has about 1500 listings, the TSX Venture has about 2300 if my research is correct. Why has no company come out with a true broad-based ETF representing the Canadian stock universe?
Steve.
@Steve: There are several reasons why fees are higher in Canada. In some cases, the difference may not be as big as it seems: US mutual funds are more likely to be sold with loads (sales fees), which don’t show up in the MERs, and trailer fees (supposedly for advice) are handled differently. But the main reason, I believe, is the lack of competition. Vanguard changed the rules in the US, and he just don’t have anything like that here. That said, ETFs are creeping up: the mutual fund market share is getting smaller, and fund companies know it.
RE: a larger Canadian index fund. As I understand it, once you get past the first couple of hundred stocks on the TSX, the market cap of the companies become so small that there would be problems with liquidity: there wouldn’t even be enough shares to go around. In any case, it wouldn’t make a meaningful difference. The TSX Composite index covers about 95% of Canada by market cap, so the other 3,600 companies would barely move the needle.
Greg, over the long term, an investor who does “dollar cost averaging” (as that term is used by consumers, not economists) isn’t really missing out by only having access to the ETF versions of Vanguard funds. In fact, you will likely benefit.
Take an example: VSS has a MER of 0.4%. The mutual fund version, VFSVX, has a MER of 0.63% (plus a purchase fee of 0.75%, which I’ll ignore, but which tilts the balance in your favour even further). If you put $1000 into VSS every month for 10 years with a broker who charges $4.95 commission on each purchase, you spend roughly $600 in commissions total. This works out over those 10 years, taking into account your aggregate investment every year, to the equivalent of just under a 0.1% MER. So you’re actually still 0.13% ahead with the ETFs versus mutual funds, even as a dollar cost averager who pays commissions on each buy. (You save even more if you look at this over 20 years.) This may be counter-intuitive, but it’s because MERs hit you every year as a percentage of your total amount of money invested, whereas commissions are fixed.
(Note however that if you’re paying $29 or $39 a trade, you should definitely consider a cheaper broker if you’re dollar cost averaging into ETFs. Also, keep in mind that brokers vary quite substantially in US exchange fees (from 0.5% to 2.5%) and try to minimize this as well — since dollar cost averagers are unlikely to be doing Norbert’s Gambit every month.)
@CCP, Could you please compare VXUS with TSX International ETFs:
1.ZDM BMO International Equity Hedged to CAD Index MER 0.46, dividends 2.33%
2.CIE Claymore International Fundamental Index MER 0.65, dividends 1.1%
3.XWD iShares MSCI World Index Fund MER 0.45, dividends 1.5% ?
They have higher MER, but pay dividends. Also, you have to buy VXUS in US$ and I thing that banks FX rates are ridiculous (especially TD Waterhouse’s). Majority of forecasts I heard that US will go down this year and thus value of your portfolio will go down.
BTW, weird that VXUS doesn’t have dividends at all, for example VTI and VSS have respectivly 1.68% and 2.14%
@CPP: Thanks for the response. The liquidity argument does make sense to me in terms of why there’s no 1500 stock CDN ETF. I hadn’t considered that. However, you say that the first couple hundred stocks on the TSX composite index essentially explain about 95% of movement so adding more companies doesn’t add much. How does that compare to VTI? Once you get past the first, say, 500 companies, do the last 2800 contribute meaningfully to returns?
VXUS sounds interesting because it adds small cap stocks to the equation. There doesn’t seem to be a Canadian equivalent that has both big cap and small cap in one (cheap) option!
@Chris: If you’re putting in $1K per month, a low commission ETF makes perfect sense. Many people though are putting in much less than that on a monthly basis. For them, ETFs are definitely not a good choice. There are many posts on this site about that exact dilemma…
@Gibor: Why do you think there are no dividends ? The Vanguard website mentions yearly distributions, just like there have been for VEA, VWO and VEU. I think dividends for Christmas/New Years rebalancing are just perfect.
The other 3 ETFs you mention are very different, more expensive, using either hedging or a value-type strategy for the first two. XWD covers all developed markets, but without emerging markets or small caps (for the US it only includes the S&P500, for example).
@Steve: The S&P 500 covers about 75% of the US market, so the mid- and small-cap stocks have a more meaningful effect. Of course, the S&P 500 and a total-market index like VTI are still extremely highly correlated.
RE: “There doesn’t seem to be a Canadian equivalent that has both big cap and small cap in one.” True, although XIC is pretty close. You can think of TSX 60 (large caps) as our equivalent of the the S&P 500, and the TSX Composite as our Wilshire 5000 (total market). Many of the stocks in XCS (small caps) are included in XIC.
The one option for a total-market Canadian fund is from Dimensional Fund Advisors, which holds almost 600 stocks. But DFA funds are not available to do-it-yourself investors:
http://www.dfaca.com/downloads/ca/pdf/fact_sheets/core/ca_core_equity_f.pdf
@Gibor: As Paul explains, the other ETFs you mention have very different allocations and strategies. VXUS hasn’t paid a dividend yet, but it certainly will. Most Vanguard ETFs pay distributions annually at the end of the year.
One question/concern I have about VSUX is that it would not allow me to benefit from rebalancing between developed foregin and emerging markets as if a particular group of companies outperform they will simply make up a bigger portion of the the overall index as it is cap weighted. If instead I held VEA, VPL and VWO I could rebalance to my target asset allocations. Of course on the down side I then would limit myself to primarily large cap foreign markets.
Second, am I correct that the Canadian portion is denominated in Canadian dollars and therefore I am not really taking on currency risk on that portion (7%). On other hand I would lose out on the witholding taxes that Canadian companies have to charge to Vanguard. OF course this only impacts Canadian dividends which would be a small percentage.
In the end it comes down to simplicity, lower future trading charges and more access to mid and small cap VS rebalancing advantages, keeping Canadian Equity seperate, saving some small amount Canadian corporate withholding taxes.
Is my understanding correct ? I am new to the DIY approach ?
@RJ: Essentially everything you’ve assumed in your comment is correct. VSUX will rebalance itself, so if your international holdings correspond to the approximate size of the world markets (that is, three times as more developed markets than emerging markets), you’re fine. If you want to overweight emeging markets for whatever reason, you’d have to hold VEA and VWO separately and adjust them yourself.
The Canadian component of VSUX is so small that any tax consequences would be measured in thousandths of a percent. It’s really a non-issue.
@CCP: With the recent news that TSX and LSE merging into one, how will this affect us index investors, if at all?
Thanks.
@Mark: I don’t expect it will have any meaningful effect at all. If I hear any news, however, I will report on it.
A follow up to my previous post about availability of trading VXUS with BMO Investorline. BMO Investorline helpdesk has sent a request to have the VXUS symbol set up and it should be available for online trading around noon on Feb 10th. If you need to trade before then you will have to call their 1-888 number.
FYI, VXUS does show up in CIBC Inverstor’s Edge accounts (I just checked myself by looking up quotes)
I was getting ready to acquire both VEA and VWO as I build up my portfolio (both as new acquisitions – I have neither currently), now I’m looking at VXUS instead to simplify things. Thanks for the heads up!
Vanguard Cuts VWO Cost To 0.22%
http://www.indexuniverse.com/sections/news/8786-vanguard-cuts-vwo-cost-to-022.html
@kjab: Thanks for the info, it’ll save me from calling them.
I have a question kinda off-topic.
Currently I’m slowly selling my mutual funds and buying ETFs and stocks, some portion of TD Monthly income I want to invest into not-so-agressive Canadian ETF. From research I did, in my opinion the best one is CRQ (Canadian Fundamental Index)., also this is the only one quity ETF with 5 stars Morningstar rating.
What do you thing about this ETF? Any other ETFs?
@Gibor: Morningstars rating are essentially meaningless. They even say so themselves, I’m sure the link is somewhere on CCP’s blog.
That being said, CRQ is a “value” type with a higher MER, and it’s a viable option, but it’s a different philosophy from cap-weighted indexes which are more typical.
I favour XIU myself though HXT has some tax advantages when not in a registered account.
@ Paul, thanks for you comment. I’m looking more not on MER, but on Performance. CRQ and XIU have similar last performance (1, 3, 6, months), but 2 and 3 years performance much better for CRQ (for 2 years 66.84% vs 48.4%).
CRQ has lower beta 0.893 vs 1.254, probably because top holdings CRQ are not including ABX and G. On other hand I have exposure to gold through XMA and some precious metals MM and wanted a little bit agressive ETF.
@gibor: I think you’re straying from the couch potato philosophy if you’re looking into that type of technical analysis, and I know I for one can’t give anything more, and I suspect no one else on here will feel equipped, either. IMO you choose a value or an indexing tilt, and stick with that.
Gibor, CRQ is based on the RAFI fundamental-weighting methodology, unlike most other index funds. (Some would argue that it isn’t an index fund at all, but a quant fund, but that doesn’t really matter.)
Over the last five years, fundamental-weighted index funds have outperformed their cap-weighted counterparts by 2% annually, roughly. That more than makes up for the difference in MER. There’s no guarantee this performance will continue going forward, because fundamental-weighting does perform its best in bear markets, but Arnott has backtested his methodology until the early 60s, and it almost always outperforms cap-weighting by some margin.
I strongly recommend CRQ because I’ve never been a true believer in cap-weighted indexes, which I see more as a form of speculation than investing. Others who believe in the efficient markets theorem would disagree. You should do your own research into the RAFI methodology and other fundamental-weighted indexes and make up your own mind. Note that even though Canadian Couch Potato is a strong indexer, he still recommends CRQ and PRF (a US equivalent that significantly beat the S&P 500 over the last five years) in some of the model portfolios, even the ones not based on fundamental indexing principles.
@ Paul, I don’t care about any philosophy (btw, I studied Scientific communism and K. Marx in University lol), I just want to beat inflation + to my retirement ….
@Chris, thank you fot the post…. sure, I know, I need to research more, but unfortunately I have work and family and not too much available time… I already hold XIU , just wanted diversify more… I like diversification lol
You mentioned PRF….. have to check it out, but generally I was wondering about good US dividend ETFs… If anyone can comment on it , it would be great…
Luckily…or not, for Canada we have only CDZ and XDV and I’m planning to buy both, as XDV top holding are banks, and CDZ almost doesn’t have banks (just 15%)
Great stuff VXUS and good review Dan. You’ve made a very compelling reason to buy it. I had my eye on VWO for my RRSP later this year (contributions done for this tax year) but this new kid on the block might do the trick, especially with the low MER and small-cap exposure.
The only downside I see, distributions are annually, like VWO. It would be nice to have units reinvested more frequently, i.e., quarterly.
@CCP: You mentioned further up the thread that “VXUS will rebalance itself”. Can you elaborate on that? I was looking through Vanguard’s site about that exact question: What’s the process of rebalancing for the ETF? Is it the underlying index that does the rebalancing, with VXUS following suit? I couldn’t find an answer.
In any case, I currently own VEA and VWO and I can do whatever rebalancing necessary to get things back to my targets (in my case, I’m at 20%VTI, 20%VEA, 10% VWO). What am I giving up with respect to rebalancing if I eventually shift to VXUS? I’ve done the math, and the MER cost is really close to the VEA/VWO combo. Annual rebalancing costs are definitely lower with VXUS so it makes sense to go that route assuming the rebalancing question works out…
Thanks as always – this post is very informative and I agree, this ETF is a signficant addition to the ETF universe.
Steve.
@gibor: Beware the great overthink…
@MyOwnAdvisor: Annual distributions are pretty standard for Vanguard funds. I actually think they are better for US-listed ETFs, since as far as I know there are no discount brokerages that will DRIP them. Throwing off quarterly distributions would just leave small amounts of cash languishing in your account.
@Steve: Sorry about the cryptic comment about rebalancing. All I meant was that VXUS is cap-weighted, so its allocation to each country is proportionate to that company’s market size. Since the emerging markets in VWO are about one third as large as those in VEA, the usual advice was to hold, say, 5% in VWO and 15% in VEA. With VXUS you don’t have to do that, because the fund adjusts these weightings automatically.
@CCP: Ah, thanks Dan, I see. There’s no actual rebalancing, but the ETF will change in percentages to match the countries in the index.
@Steve in Oakville: What do you mean?!
@CPP: Do VXUS and VWO (I believe you addressed VWO above) employ currency hedging; i.e. do they expose Canadians to the US dollar or the actual currencies within the ETF?
Thanks
For example, on another site, I found the following:
“To add another layer of diversification, the Complete Couch Potato avoids currency hedging for its foreign holdings. This has provided a huge cushion during the bear market, as the US dollar is up more than 11% against the loonie since May 1, and the euro (surprise!) is 8% higher than it was in early January. As a result, ….The Vanguard Total International Stock (VXUS) is down 18% in its native currencies, compared with 13.82% in Canadian dollars.”
Does this imply that VXUS is unhedged and that the unhedged position was a bonus to Caandians as a result of exposure to all of the currencies within the ETF?
Thanks again.
@Jack: Neither VXUS nor VWO use currency hedging. And, yes, in most cases (but not all) the exposure helped Canadians last year, as the loonie depreciated against several foreign currencies in 2011.
MER for VXUS has gone down to 0.18% (as well as a reduction for a few other Vanguard ETF’s)!
http://www.investmentnews.com/article/20120304/REG/303049972