Slice and Dice International
| International Stocks |
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| International Stocks |
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| Vanguard International Funds |
As an alternative to investing in a foreign total market fund, it is possible to "slice and dice" by holding separate regional funds: Emerging Markets plus either a Developed Markets fund or separate Pacific Rim and European funds.
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Characteristics of Slice And Dice
The primary advantage of a total market fund is simplicity: a single fund whose market weights are maintained automatically. A secondary benefit for a Vanguard investor is the potential inclusion of Canadian stocks, which represent about 6% of Vanguard FTSE All-World ex-US Index Fund.
Possible advantages/disadvantages of slicing and dicing internationally:
Expense Ratio Comparison
| Fund | ETF [1] | Investor | Admiral | Purchase Fee (Mutual Fund) |
Redemption Fee (Mutual Fund)[2] |
|---|---|---|---|---|---|
| Vanguard FTSE All-World ex-US Index Fund | 0.25% | 0.40% | n/a | n/a | 2.00%, 2 months |
| Vanguard Tax-Managed International Fund | 0.16% | 0.20% | n/a | n/a | 2.00%, 2 months |
| Vanguard European Stock Index Fund | 0.18% | 0.29% | 0.18% | n/a | 2.00%, 2 months |
| Vanguard Pacific Stock Index Fund | 0.18% | 0.29% | 0.18% | n/a | 2.00%, 2 months |
| Vanguard Emerging Markets Stock Index Fund | 0.27% | 0.39% | 0.27% | n/a | 2.00%, 2 months |
- ↑ ETF shares are subject to commission, spread, and discount/premium costs upon purchase and sale.
- ↑ The purchase and redemption fees are paid into the fund. The redemption fee is charged only on shares held for less than the indicated holding period (permanent for Vanguard Emerging Markets Stock Index Fund).
The relative cost advantage of using ETF or investor/admiral shares is dependent on many factors, including size and frequency of the investment, expected holding period, the level of commission and trading costs, and realized return. To determine the relative costs between an ETF/mutual fund decision, one can use the Vanguard Cost Comparison calculator.
Taxes
- Foreign tax credit
With the transition of Vanguard Total International Stock Index Fund and Vanguard Developed Markets Index Fund from fund of funds to funds now directly holding stocks, all Vanguard international funds fully qualify for the foreign tax credit.
- Tax Loss Harvesting
Slicing and dicing the international allocation may give rise to more tax loss harvesting opportunities because the components (Europe, Pacific, and Emerging Markets) do not necessarily move in the same directions.
- Qualified dividend
Qualified dividends, which are subject to a maximum 15% tax rate, were realized over the past two years at the percentage rates indicated in the following table. Only the tax-managed international approach appears likely to attain a sustainable realized qualified dividends advantage.
| Fund | Percentage of Qualified Dividends 2007 | Percentage of Qualified Dividends 2008 | Percentage of Qualified Dividends 2009 | Percentage of Qualified Dividends 2010 |
|---|---|---|---|---|
| Vanguard FTSE All-World ex-US Index Fund | 87.23% | 73.82% | 76.55% | 71.16% |
| Vanguard European Stock Index Fund | 82.29% | 76.32% | 82.46% | 71.66% |
| Vanguard Pacific Stock Index Fund | 60.58% | 100.00% | 77.49% | 81.25% |
| Vanguard Emerging Markets Stock Index Fund | 59.93% | 64.33% | 61.38% | 55.54% |
| Vanguard Tax-Managed International Fund | 100.00% | 100.00% | 100.00% | 100.00% |
| Vanguard Developed Markets Index Fund | n/a | 78.80% | 69.51% | 71.78% |
Sources:Qualified dividend income—2009 year-end figures
Qualified dividend income—2008 year-end figures
Diversification of Currencies
According to Rick Ferri in All About Asset Allocation, having fixed allocations between Europe, Pacific, and EM diversifies currencies better than one fund.
Possible Rebalancing Bonus
Also according to Rick Ferri, rebalancing of those currencies "could provide a diversification benefit, as it has in the past". William Bernstein suggests a rebalancing bonus may be obtainable with Emerging Markets (see Links). Note that rebalancing in a taxable account may lead to payment of capital gains taxes.
Overweighting Pacific or Emerging Markets
Historically Europe has been more correlated with the U.S. market than Pacific and Emerging Markets, so the investor may want to overweight Pacific or EM. The current market weight as of 01/31/2010 is approximately 50.1% Europe, 26.2% Pacific and 23.7% EM according to the allocation of Vanguard Total International Stock Index Fund, which follows the market capitalization.
Avoiding Regional Bubbles
Total market funds will change as the underlying market weights change. With Japan as an example, maintaining a fixed weight to Japan/Pacific in the 80's might have avoided an overallocation to Japan. More recently, Emerging Markets has increased to 23% of the world market in 2010 [1] from about 4% in 1998 [2].
See Also
References
- ↑ according to composition of Vanguard Total International Market fund, January 2010
- ↑ John Bogle, Common Sense on Mutual Funds, 1999
External Links
- Current International Market Weights (Standard & Poors)
- Real Equity Returns in Key Markets over Selected Periods (from Dimson, Marsh, and Staunton)
- William Bernstein - Rebalancing Individual National Markets
- FTSE vs. S&D - Tax Implications (forum topic)
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Wiki article link: [url=http://www.bogleheads.org/wiki/Slice_and_Dice_International]Slice and Dice International[/url] |
