Why not VSS instead of VXUS?

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brademac
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Why not VSS instead of VXUS?

Post by brademac »

Many of us invest in international equities to diversify our portfolio. If we do this to diversify then why not use VSS (ex US small cap) instead of VXUS (international index)? The reason being small cap international companies are less intertwined with US consumers/companies than VXUS which is heavily weighted to large cap international companies that do more business in the US.

I know that VXUS truly captures the ex US market on a market weight basis, but it seems to me if we really want to buy international equities to diversify then we are better off with VSS despite the fact that it is weighted to small and mid companies and might be a little more volatile than VXUS.

And a side benefit of VSS is that it is free to hold. After the securities lending income we are actually getting paid to hold VSS as that income pays the expense ratio and more.
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anon_investor
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Re: Why not VSS instead of VXUS?

Post by anon_investor »

brademac wrote: Sat Dec 12, 2020 6:50 pm Many of us invest in international equities to diversify our portfolio. If we do this to diversify then why not use VSS (ex US small cap) instead of VXUS (international index)? The reason being small cap international companies are less intertwined with US consumers/companies than VXUS which is heavily weighted to large cap international companies that do more business in the US.

I know that VXUS truly captures the ex US market on a market weight basis, but it seems to me if we really want to buy international equities to diversify then we are better off with VSS despite the fact that it is weighted to small and mid companies and might be a little more volatile than VXUS.

And a side benefit of VSS is that it is free to hold. After the securities lending income we are actually getting paid to hold VSS as that income pays the expense ratio and more.
I think some people do. Others like myself have 0% international (Total US Stock Market makes up most of my equities).
livesoft
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Re: Why not VSS instead of VXUS?

Post by livesoft »

Make all the arguments you want, but at the end of day you will convince no one and you have to follow your own ideas to their conclusion.

Full disclosure: Roughly half my international holdings are in VSS. At this time we do not own any shares of VXUS nor VTIAX nor IXUS.
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Re: Why not VSS instead of VXUS?

Post by sunnywindy »

I own VEU (large-cap & functionally identical to all-cap VXUS) and use VSS to overweight small-caps. VSS is more volatile but has the potential for higher returns over the long term. Whatever you do, I would recommend holding large and small caps in your portfolio for both US and ex-US at whatever ratio you prefer. Because of their portfolio construction and super low cost, it is impossible to mess this up, so you will be fine regardless.
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HawkeyePierce
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Re: Why not VSS instead of VXUS?

Post by HawkeyePierce »

Half my international holdings are in ex-US small caps. I don't use a total international fund.
Tamalak
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Re: Why not VSS instead of VXUS?

Post by Tamalak »

I don't invest in international to be 'less entwined with the US' specifically, I invest in international so I can own the full haystack :sharebeer
Brian2d
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Re: Why not VSS instead of VXUS?

Post by Brian2d »

I originally took the approach of using small cap int'l to maximize diversity, but as my international allocation for a variety of reasons has aligned much more closely with the global ex-us weight (I no longer overweight US), I'm wondering if I should reconsider that thought. Is holding the global market the best approach, or is there still a maximal diversification benefit to holding int'l small cap because the US is such a large part of the overall global market?
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pokebowl
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Re: Why not VSS instead of VXUS?

Post by pokebowl »

brademac wrote: Sat Dec 12, 2020 6:50 pm Many of us invest in international equities to diversify our portfolio. If we do this to diversify then why not use VSS (ex US small cap) instead of VXUS (international index)? The reason being small cap international companies are less intertwined with US consumers/companies than VXUS which is heavily weighted to large cap international companies that do more business in the US.

I followed similar logic to other BH posters on this issue for the last couple years, however never took the plunge myself. While logically it makes sense (multinationals make up all the large cap so focus on small), however reality doesn't agree with this world view. I haven't seen convincing evidence of any correlation benefit to using VSS over VXUS or any total international index. VSS has been very correlated (greater than 0.90) to the movement of the U.S stock market for several years now which mirrors the total market alternative. In the current market if you wanted an index fund that is decoupled from the activity of the U.S market you will have to select from a basket of single country index funds. Granted in recent years these fund ERs have dropped to reasonable levels, so this may be the more desirable approach going forward?

I haven't done the research, but a quick look at for example several Switzerland index ETFs, I see these are much less correlated to the US markets versus VSS. Leaving Europe altogether you get even lower correlations, example South Korea indexes are even lower than Switzerland. Depends on your objective. I personally would go this route (not these countries specifically) if you are looking at indexes that are decoupled from the U.S market, though you'll have to define your criteria here.
Last edited by pokebowl on Sat Dec 12, 2020 10:40 pm, edited 1 time in total.
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Re: Why not VSS instead of VXUS?

Post by grabiner »

While I do hold international large-cap, I overweight international small-cap with VSS for the same diversification reason you mentioned. I have held VSS almost since it opened in 2009, and held the actively-managed International Explorer before that.
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Re: Why not VSS instead of VXUS?

Post by roth evangelist »

Buying VSS *in place* of VXUS makes no sense. Would you buy VB instead of VTI? You might consider adding VSS to tilt your portfolio toward international small caps, that makes sense.
SouthernFIRE
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Re: Why not VSS instead of VXUS?

Post by SouthernFIRE »

I take this approach (however I am quite underweight int’l). I am young enough to bear the higher risk of VSS. We’ll see how it works out.
whereskyle
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Re: Why not VSS instead of VXUS?

Post by whereskyle »

brademac wrote: Sat Dec 12, 2020 6:50 pm Many of us invest in international equities to diversify our portfolio. If we do this to diversify then why not use VSS (ex US small cap) instead of VXUS (international index)? The reason being small cap international companies are less intertwined with US consumers/companies than VXUS which is heavily weighted to large cap international companies that do more business in the US.

I know that VXUS truly captures the ex US market on a market weight basis, but it seems to me if we really want to buy international equities to diversify then we are better off with VSS despite the fact that it is weighted to small and mid companies and might be a little more volatile than VXUS.

And a side benefit of VSS is that it is free to hold. After the securities lending income we are actually getting paid to hold VSS as that income pays the expense ratio and more.
Factors are hooey and no one knows what factor/style/region will outperform when. VSS is a behavioral-risk nightmare waiting to happen. Buy total market index funds.
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truenorth418
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Re: Why not VSS instead of VXUS?

Post by truenorth418 »

brademac wrote: Sat Dec 12, 2020 6:50 pm
And a side benefit of VSS is that it is free to hold. After the securities lending income we are actually getting paid to hold VSS as that income pays the expense ratio and more.
Could someone please explain what this means "securities lending income"?
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Re: Why not VSS instead of VXUS?

Post by JonnyDVM »

I also hold VSS as 25% of international holdings. That being said I can’t argue that it’s somehow superior to VXUS.
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averagedude
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Re: Why not VSS instead of VXUS?

Post by averagedude »

20% of my International holdings is in VSS, but I use it as a tit, not a core International holding. I'm in favor of holding both large and small International companies.
pascalwager
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Re: Why not VSS instead of VXUS?

Post by pascalwager »

JonnyDVM wrote: Sun Dec 13, 2020 9:09 am I also hold VSS as 25% of international holdings. That being said I can’t argue that it’s somehow superior to VXUS.
VSS is a superior diversifier, compared to VXUS, with respect to VTI.

(Due to account fund limitations, fully 67% of my ex-US is Vg total international index--which includes emerging markets. The other 33% of my ex-US is the Vanguard emerging markets index fund. But considering the current EM part of total international, my overall EM is currently about 51% of ex-US. This provides a portfolio percentage of about 25% EM--my target.)
Last edited by pascalwager on Sun Dec 13, 2020 12:53 pm, edited 1 time in total.
HawkeyePierce
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Re: Why not VSS instead of VXUS?

Post by HawkeyePierce »

truenorth418 wrote: Sun Dec 13, 2020 8:02 am
brademac wrote: Sat Dec 12, 2020 6:50 pm
And a side benefit of VSS is that it is free to hold. After the securities lending income we are actually getting paid to hold VSS as that income pays the expense ratio and more.
Could someone please explain what this means "securities lending income"?
Funds lend out the stocks they hold to other investors looking to short those stocks. In exchange, they're paid a fee.

Some funds return those fees to their investors (eg us), others keep it for the fund company. IIRC Vanguard returns 100% of its securities lending fees to their investors.

For funds that hold less-liquid stocks like VSS, that income can more than offset the expenses of the fund, because the fees charged to the shorts are higher.
Last edited by HawkeyePierce on Sun Dec 13, 2020 1:08 pm, edited 1 time in total.
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Re: Why not VSS instead of VXUS?

Post by Robot Monster »

Are Small-Caps riskier? Doing a quick search I find:
Small companies simply don't have the same resources as larger companies and aren't industry leaders that can easily survive unexpected crises. They can't borrow money as easily as big companies, don't have as much cash on hand, and are more likely to have negative cash flow. Therefore, they have a greater chance of going bankrupt during a market crash.
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TSPballer
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Re: Why not VSS instead of VXUS?

Post by TSPballer »

Certainly not here to convince anyone that my approach is superior, but I shoot for the following allocation:

60/40 - US/International

Within international, 50/25/25 - VXUS/VSS/VWO

It seems that low/negative correlations with the US TSM are tough to come by these days but the above is my best "college try" to make it happen.
PennyWise7
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Re: Why not VSS instead of VXUS?

Post by PennyWise7 »

TSPballer wrote: Sun Dec 13, 2020 7:43 pm Certainly not here to convince anyone that my approach is superior, but I shoot for the following allocation:

60/40 - US/International

Within international, 50/25/25 - VXUS/VSS/VWO
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freyj6
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Re: Why not VSS instead of VXUS?

Post by freyj6 »

VSS makes up most of my international developed holdings. I don't own any VXUS.

The way I see it, if we believe in factors at all (such as "small"), there's a decent chance it'll outperform in the long run, a good chance it'll be roughly the same and a small chance that it will underperform. I'll take those odds.

Honestly though, they track so closely to each other that it probably won't make a huge difference either way.
bradshaw1965
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Re: Why not VSS instead of VXUS?

Post by bradshaw1965 »

Whatever helps you to not tinker too much is going to be fine. Thinking is fine, I've never done great with the tinkering. The one thing that I would do differently is pay a lot of attention to taxes and distributions for taxable accounts. I think ETF's probably are better for this but that is a relatively new thing.
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Re: Why not VSS instead of VXUS?

Post by secondopinion »

brademac wrote: Sat Dec 12, 2020 6:50 pm I know that VXUS truly captures the ex US market on a market weight basis, but it seems to me if we really want to buy international equities to diversify then we are better off with VSS despite the fact that it is weighted to small and mid companies and might be a little more volatile than VXUS.
I hold VSS along side of VPL and VGK. Kind of messy, but helps me pin point the risk balancing.

I would not know exactly, but international stock should get most of the diversification benefit regardless of the cap; in my thought process, it is more the currency, tax, political, and local conditional differences than who buys what that gives the variation.
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PennyWise7
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Re: Why not VSS instead of VXUS?

Post by PennyWise7 »

From Morningstar review of VSS

Small-cap firms derive most of their revenue from their local economy, making them more dependent on local business conditions than large-cap multinational firms. That means they can better diversify a U.S.-centric portfolio than their large-cap counterparts.

While this strategy effectively captures the overseas small-cap market, its regional composition differs from the category average in some important ways. It has a higher allocation to stocks listed in Canada and emerging markets than a typical competitor. This can affect its risk profile because these markets have a large stake in stocks from the materials and energy sectors. Companies from these segments can be risky because of their exposure to volatile commodity prices. As a result, this portfolio has been one of the riskier options in the category.
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Re: Why not VSS instead of VXUS?

Post by Johm221122 »

Half my international is in small/ mid cap funds and the other half in Total International. Plus it's actively managed fund ( International Explorer). I think you'll find all Bogleheads actually are invested differently and there is no one portfolio that we have.
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Re: Why not VSS instead of VXUS?

Post by Chrono Triggered »

I have 50% of each. I've been looking at AVDV instead of VSS (or instead of VXUS) but I haven't decided anything.
PennyWise7
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Re: Why not VSS instead of VXUS?

Post by PennyWise7 »

Came across this thread yesterday and liked the rationale for using VSS / VWO to get more diversification than VXUS. viewtopic.php?t=286862&start=50

It’s long but essentially small cap international provides added diversification bc less correlated with VTI than are other large cap focused international ETFs, including VXUS. Don’t want VSS to be my only international holding so including VWO, emerging markets, which is mostly large cap and also less correlated with US market. The thread is enlightening, I thought VXUS or equivalent was the only international Boglehead way, apparently not so.
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