Why do Vanguard funds not weight foreign allocations right?

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ploldo
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Why do Vanguard funds not weight foreign allocations right?

Post by ploldo »

Most index funds weight their investments by market cap. This seems to be universally true except for when it comes to the US/International blend.

First, compare the US/Int'l blend of VFFVX (Target retirement fund) vs VTWSX (total world stock index). The world stock index has about 50% International (minus Canada) allocation. Fine (for now). But none of the target retirement date funds have this same allocation. They all have much more US allocation ranging from 59% to 63%. Shouldn't these always equal 50% as the total world stock index does? Maybe the idea is foreign stocks are more risky.


Second and more important point:

The market cap weighted investment in the US should only be about 34% NOT 50%.

Based upon data here:
http://data.worldbank.org/indicator/CM.MKT.LCAP.CD
http://www.aei-ideas.org/2013/01/world- ... -trillion/

US market cap % is about 18.6 trillion / 54.6 trillion = 34%. So why isn't VTWSX 34% US funds (excluding Canada which is only 2 trillion)?
Elbowman
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Re: Why do Vanguard funds not weight foreign allocations rig

Post by Elbowman »

Foreign stocks have currency risk, which is uncompensated. So the point of view Vanguard has with its target retirement funds is you only need enough foreign stocks to get the bulk of the diversification benefit. Adding more international than needed adds risk without return.
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G-Money
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Re: Why do Vanguard funds not weight foreign allocations rig

Post by G-Money »

Here is Vanguard's explanation for why they constructed their Target Retirement funds the way they did: https://personal.vanguard.com/pdf/icrtdf.pdf (discussion about international equity allocation is on page 10).

Here's another Vanguard research paper about investing in international equities, with a recommended range for the split between domestic/international: https://personal.vanguard.com/pdf/icriecr.pdf

And another Vanguard paper regarding home country bias: https://pressroom.vanguard.com/nonindex ... e_Bias.pdf


The idea of market-cap weighting needs to break down at some point. For example, you apparently take no issue with the fact that Vanguard does not offer a balanced fund that holds stocks and bonds in global market-cap weight. IIRC, bonds constitute >50% of marketable securities, i.e., there is more money invested in fixed income than in stocks. So all these stock-heavy 60/40, 80/20, etc. portfolios also aren't pure market-weight.

I don't sweat these things. If you want to hold equities at global market-weight, just hold VTSAX and VTIAX (or the ETF equivalents) in market weight. It's cheaper than the balanced funds anyway.
Last edited by G-Money on Thu May 30, 2013 12:14 pm, edited 1 time in total.
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Aptenodytes
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Re: Why do Vanguard funds not weight foreign allocations rig

Post by Aptenodytes »

Vanguard doesn't weight international by market cap in its target date funds for the same reason that nobody else does (as far as I know) -- very few investors want it. Even on this forum I believe only a minority set their US percentage based on market cap. Most investors tilt toward their home markets -- some of their reasons are sensible (e.g. currency risks) but many are based on intuition and habit.

It is no big deal. You can easily customize your tilt by adding an international fund.
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G-Money
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Re: Why do Vanguard funds not weight foreign allocations rig

Post by G-Money »

ploldo wrote:The world stock index has about 50% International (minus Canada) allocation.
BTW, Canada is in there.

Canadian stocks comprise 3.8% of VTWSX, 4th most of any country: https://personal.vanguard.com/us/funds/ ... =INT#tab=2

Canadian stocks comprise 7.3% of the Total International fund (used in the Target Retirement and LifeStrategy funds), 3rd most of all countries (ex-US): https://personal.vanguard.com/us/funds/ ... =INT#tab=2
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G-Money
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Re: Why do Vanguard funds not weight foreign allocations rig

Post by G-Money »

ploldo wrote:Second and more important point:

The market cap weighted investment in the US should only be about 34% NOT 50%.

Based upon data here:
http://data.worldbank.org/indicator/CM.MKT.LCAP.CD
http://www.aei-ideas.org/2013/01/world- ... -trillion/

US market cap % is about 18.6 trillion / 54.6 trillion = 34%. So why isn't VTWSX 34% US funds (excluding Canada which is only 2 trillion)?
I would be very reluctant to take one number from one place and another from another place and assume that they are calculated the same way. For example, did you add up the sums of all the countries' capitalizations and confirm that they equal $54.6 trillion? I'm guessing they don't.

Here's a somewhat dated (February 29, 2012) fact sheet directly from FTSE, whose Global All Cap Index is the benchmark for VTWSX: http://www.ftse.com/Indices/FTSE_Global ... tsheet.pdf

It indicates that as of 2/29/2012, USA = 44.97% of the index. I don't know how US has performed vs. ex-US since then, and I don't know what currencies have done since then. Both of those would shift the US/ex-US balance one way or the other. The link of VTWSX I gave you before indicates that as of 4/30/13, 52.6% of the fund is in "foreign," which means 47.4% would be in US, which is pretty close to the 44.97% figure from 15 months ago. So I'd be far more inclined to trust that figure.

Which is a long way of saying I believe current global weight is much closer to 50/50 (47.4/52.6) than 34/66.
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