After analyzing about 100 ETFs, looking for funds that provided the maximum diversification benefit coupled with a relatively low expense ratio, I came up with these four funds:
- iShares Edge MSCI Min Vol EAFE ETF (EFAV) ER: 20bps
- iShares Edge MSCI Intl Size Factor ETF (ISZE) ER: 30bps
- Vanguard FTSE All-Wld ex-US SmCp ETF (VSS) ER: 13bps
- Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF) ER: 20bps
VSS includes some emerging markets stocks, while the other three hold primarily stocks from developed markets.
ISZE and HDEF are the best diversifiers of the the four, and holding both would somewhat improve portfolio diversification over owning either one alone.
VSS has the lowest expense ratio.
With the caveat that some of these funds don't have a long history, I compared to a portfolio of Vanguard Total Stock Market ETF, Vanguard Total Bond Market, & Vanguard Total International Stock ETF to the more diverse portfolio of Vanguard Total Stock Market ETF, Vanguard Total Bond Market, iShares Edge MSCI Intl Size Factor ETF, & Xtrackers MSCI EAFE High Div Yld Eq ETF.
https://www.portfoliovisualizer.com/bac ... tion5_2=30
The more diverse portfolio would have had 21% lower volatility but only 3% lower returns, so much better risk-adjusted returns (Sharpe ratio of 1.70 versus 1.40).
Because large-cap stocks from developed nations have relatively high correlations with US stocks AND tend to dominate the broad international index funds (such as Vanguard Total International Stock ETF), it's my opinion that a US-based investor who wants the benefits of international diversification may be better off selecting their international holdings specifically with an aim of maximizing that diversification benefit. In principle, this would allow the investor to gain the optimal benefit with a lower international allocation. These four funds are all good choices for doing that.
I found it interesting that, at least for the time period I examined, ISZE and HDEF offered better diversification than a broad emerging markets index fund (like VWO or IEMG).