Bogleheads

[PiperWarrior]

Disclaimer

This FAQ is no longer kept up-to-date. For the latest version, look for my post at FAQ on Vanguard International Funds.

Introduction

With the introduction of VFWIX All-World ex-US fund, many people seem to wonder whether they should choose VGTSX Total International or VFWIX. Here is an attempt to address frequently asked questions in a single topic so that people can point to this topic later. Of course, I'm open to suggestions, corrections, eggs, tomatoes, etc.

1. What broad international index funds does Vanguard have?

VGTSX Total International Stock Index
VFWIX All-World ex-US

2. Should I buy VGTSX or VFWIX?

Buy VGTSX in a tax-advantaged account and VFWIX in a taxable account.

VFWIX

- Tax efficient. Its dividends are 100% qualified, at least in 2007. It is eligible for foreign tax credit. It's very unlikely to distribute capital gains in the event that a country (think South Korea) moves out of emerging markets and joins developed markets.
- The expense ratio (0.40%) is higher than that of VGTSX (0.27%) , but that's more or less offset by foreign tax credit, which is expected to be around 0.16%.
- Includes Canada.
- Vanguard might introduce Admiral Shares as the fund grows. To this date, Vanguard has never issued Admiral Shares for a fund of funds, which VGTSX is.
- 0.25% purchase fee, which goes into the fund.
- Vanguard is expected to lower the expense ratio as the fund grows. Historically, Vanguard has been good at reducing the expense ratio as the fund grows. (For example, check out the prospectus for VTSMX Total Stock Market.)

VGTSX

- Not as tax efficient as VFWIX. Its dividends are about 70% qualified. It is not eligible for foreign tax credit because IRS says that a fund of funds is not eligible. (Don't ask!)
- The expense ratio (0.27%) is lower than that of VFWIX (0.40%).
- Does not include Canada.

3. How much should I allocate to international?

That's a personal choice. According to the poll, most people on this forum allocate anywhere from 20% to 50% of stocks to international. Pick a number and stick to it.

If you would like to use history as a guide, see the chart at the bottom of

http://diehards.org/forum/viewtopic.php?p=3721

Notice that domestic/international=80/20 gives you the least volatility with a better return than 100/0. 60/40 gives you an even better return with roughly the same volatility as 100/0. If you go beyond 50/50, you get a lot of volatility for not much return.

4. What is foreign tax credit?

Foreign tax credit in our context is a refund of tax that Vanguard pays in foreign countries. When Vanguard distributes dividends, they are already reduced by tax paid in foreign countries. With foreign tax credit, you can get that amount back, but you still have to pay Federal income tax on the dividends before the foreign tax is paid. Sorry, foreign tax credit isn't free money.

5. I am running out of tax-advantaged room. Should I put VTSMX Total Stock Market or VFWIX in a taxable account?

In general, you want to put VFWIX in a taxable account so that you can get foreign tax credit, but your individual situation may be different.

6. Should I hold VFWIX in a taxable account for foreign tax credit even though I haven't max out my tax-advantaged account?

No, you should fill your tax-advantaged account first with VGTSX. The only exception may be a nondeductible IRA, but if you have a nondeductible IRA, you should have enough money to hire a decent accountant.

7. I have VGTSX in a taxable account. What should I do?

If you have loss in your VGTSX or a small amount of capital gains, you can sell it and buy VFWIX. Otherwise, you can direct new money, including distributions from VGTSX, into VFWIX. For simplicity you should just stick with it because the difference is probably not significant to make up for the difference in capital gains from selling.

8. Wow, VFWIX has expense ratio of 0.40%? Should I buy VEU, the ETF version of VFWIX, to save on the expenses?

If you take the ETF route, you can avoid the 0.25% purchase fee and two-month redemption fee, but you will likely have to pay commission on the purchase and sale. In general, ETF shares may be a good choice if:

- you already have a brokerage account which has low commissions (no more than $10 or so),
- you are planning to invest in large lump sum(s), rather than small monthly contributions (which would incur a commission at every purchase),
- your brokerage allows for (free) reinvestment of fund distributions, and
- you can resist the temptation to trade the ETFs too often.

For a general discussion of whether to go ETF, see To ETF or Not to ETF.

9. I have VTMGX Tax-Managed International. Is that OK?

It's a great fund except that it does not have emerging markets or Canada. The combination of VTMGX and VEIEX Emerging Markets Stock Index should work just as well as VFWIX. If you wanted to, you can direct new money to VFWIX, but I don't think that would make a big difference. The combination of VTMGX and VEIEX is cheaper than VFWIX, but VEIEX distributes some non-qualified dividends.

Advanced Questions

1. What funds are available if I want to own Europe, Pacific, and emerging markets separately?

See http://diehards.org/forum/view....2866#82866

2. I heard that slicing and dicing boosts return. Why go broad?

See http://www.diehards.org/forum/....hp?t=10864

3. Both VGTSX and VFWIX appear to lack small-cap. What should I buy to fill that area?

Unfortunately, this is an area that Vanguard isn't good at. You might want to consider DLS and GWX. Search for "site:diehards.org DLS GWX" on Google. You get a lot of hits. If your 401(k) or 403(b) is administered by Vanguard, you might have access to VINEX International Explorer.

[Edited to quantify expense ratios and clarify 100% qualified dividends.]
[Edited to move advanced questions to the end.]
[Edited to fix a typo.]
[Edited to add a link to Ken's post about other international funds from Vanguard.]
[Edited to expand the ETF question.]

[tfb]

[PiperWarrior]

[InvestingMom]

Overall, this looks like an excellent summary. As always I am amazed at how generous the diehards are with their time. Here are a few small comments/questions:

How significant is the foreign tax credit? If it is possible to quantify this...even within a range...it would be helpful. I had understood from previous posts that it was not very significant. IF this is true then it might be worth noting.

Point 7. I would delete your last comment that it is "not horribly bad". Perhaps just say something like " I think for simplicity one should just stick with it because the difference is probably not significant to make up for the difference in capital gains from selling.

Point 9. Spell out S&D (Well I suppose everyone knows what this means but often times people new to the board are asking the question and they don't know?)

Points 9 and 10-Consider deleting them since they are not really not addressing the question of whether to go with VGTSX or VFWIX? On the other hand, you do provide good information. Oh here is a compromise...put some sort of divider that says something like-Further Advanced Questions related to International Investing.

[PiperWarrior]

[Ted Valentine]

Good job. Given that this question is asked weekly at least, this is a useful addition to the board.

I don't know how technical you want to get but you might consider indicating under VGTSX that it is an inclusive "Fund of Funds" comprised of 3 Vanguard index funds: Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund. The three index funds are allocated based on the market capitalization of European, Pacific, and emerging markets stocks in the Total International Composite Index. While these funds cover the great majority of the international stock market, some of the countries that appear in VFWIX that do not fit into any of those categories (for example, Canada) are not represented in the fund. Additionally, if one of the countries currently held through the Emerging Markets Stock Index Fund were no longer classified as an Emerging Market, and was also not a part of Europe or the Pacific, that country would cease to be represented in the Total International Stock Index Fund.

Comparatively, VFWIX employs a passive management or indexing investment approach designed to track the performance of the FTSE All-World ex-US Index. The index includes approximately 2,200 stocks of companies in 47 countries, from both developed and emerging markets around the world.

Also, some people may care that a fund has a track record. You may want to mention that the Vanguard FTSE All-World ex-US Index Fund began accepting investments March 8, 2007.

Maybe too much information?
_________________
“A bear market is an extended period of time during which people who think this time is different sell all their investments to people who understand that this time is never different.”

[tfb]

Poster Ken also did a comparison table in the another thread:

http://diehards.org/forum/view....2866#82866
_________________
The Finance Buff

[LH2004]

[PiperWarrior]

[baw703916]

Fantastic summary, PiperWarrior!

My only suggestion might be to elaborate a little on #8 (ETF vs. MF):

Something to the effect of..

"The VEU ETF shares also avoid the 0.25% purchase/redemption fee, but you will likely have to pay commissions on the purchase. In general, ETF shares may be a good choice if:

-you already have a brokerage account which has low commissions (no more than $10 or so)
-you are planning to invest in large lump sum(s), rather than small monthly contributions (which would incur a commission at every purchase)
-your brokerage allows for (free) reinvestment of fund distributions
-you can resist the temptation to trade the ETFs too often.

Good Job! I hope you plan to submit this to the Library.

Best wishes,
Brad
_________________
I don't foresee any Black Swans appearing in the future

[PiperWarrior]

[Barry Barnitz]

[james22]

Might you mention the option to tilt to value (VTRIX) or growth (VWIGX)?

[PiperWarrior]

[simba]

Great job PW!

May I suggest including the link Calculate and compare costs for Vanguard ETFs and mutual funds for folks who want to go the ETF route or want to compare the costs etc.

Regards,
Simba

[grabiner]

[cudaman]

[PiperWarrior]

[cudaman]

PiperWarrior - My bad. I see your link has it right. Thanks.