VEU vs VEA vs VXUS splitting hairs...which is better

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BenJ
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VEU vs VEA vs VXUS splitting hairs...which is better

Post by BenJ »

I'm not sure why Vanguard has so many ETFs and Mutual funds which have the same mostly the same features. If you were to pick an international fund, which of these is the best? They all have pretty much the same holdings.

All are 99% or so foreign holdings.

VEA (FTSE Developed Markets) has the lowest management fee of 0.09 compared to 0.15 for the other two.

VXUS (Total International Stock) has 5807 stocks compared to 2463 for VEU (FTSE All-World ex-US) and 1402 for VEA so has potentially less risk and more closely resembles the market.

VXUS has 2.7% turn over compared to 4.2% for VEU and 4.4% for VEA so should be more tax efficient (presuming one can't claim foreign tax credit).

VXUS has small caps, which VEU does not. VEA does not have emerging markets or Canada. I assume VXUS is the best all-in-one international fund, as it's what Vanguard uses for their lifestrategy and target retirement funds, but I'm not sure if it has equal weighting of the representation of all non-US stocks.

Which is preferred as the international index fund and why?
Last edited by BenJ on Sun Jan 18, 2015 1:11 am, edited 1 time in total.
Postmon
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by Postmon »

VXUS is most comprehensive as it has small cap and emerging markets. If you only want one international fund, it's the one to go with.
lazyday
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by lazyday »

VXUS doesn't have to trade when a small stock becomes large enough for inclusion in the other funds, or when a country enters or leaves the set of developed markets. Sometimes this trading might be free when it's done within Vanguard, but otherwise it can be expensive; smaller stocks and some foreign stocks are costly to trade.

It's also the most diversified of the choices you list.

You might argue for rebalancing between Developed and EM, and/or small and large. Otherwise, total market seems the best choice.
livesoft
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by livesoft »

There are BIG differences between these funds. Please see this post with the chart:
viewtopic.php?f=1&t=153841 which shows what you said graphically.

Which one is best? It depends on which one you think is best, but this might help, too: http://www.cbsnews.com/news/vanguard-to ... new-champ/

The tax efficiency numbers will probably surprise you. When the information is available for 2014, I will post them, but without the FTC, the order of efficiency is (best) VTI VWO VEA VXUS VSS (worst). And with the FTC, the order is (best) VSS VWO VEA VXUS VTI (worst). This is for someone in the 25% marginal income tax bracket. The order changes depending on one's tax bracket. I put in VTI for a comparison. (I will have VEU numbers added for 2014.)
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lazyday
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by lazyday »

livesoft wrote:And with the FTC, the order is (best) VSS VWO VEA VXUS
How did VXUS end up worse than its (more or less) components?

I suppose if there were high shareholder fund flows into some of the other funds, then the dividend yield paid to shareholders of those funds could be reduced.

Or Canada has terrible tax efficiency.

Or maybe I misunderstand. Are you talking about total tax efficiency, including the FTC?
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nisiprius
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by nisiprius »

It's historical. I can't speak to livesoft's tax considerations. In a tax-advantaged account, IMHO, VXUS should be the "default" choice:

Here are my reasons for saying it should be the default:

(The mutual fund-ETF counterparts are VFWIX=VEU, VDVIX=VEA and VGTSX=VXUS).

--If your goal is "to own the whole global stock market outside of the U.S." then VFWIX/VEU is probably close enough, but nevertheless VGTSX/VXUS is clearly a more faithful realization of that particular goal.

--VGTSX is the one Vanguard choose to spotlight as one of its select funds, "well-established, broadly diversified, low-cost funds selected by our Portfolio Review Department."

--VGTSX is the one Vanguard uses in its own all-in one LifeStrategy and Target Retirement funds.

--VGTSX has $134 billion, VDVIX $45 billion, VFWIX $22 billion assets under management. That doesn't tell you much except that VGTSX is the giant of the three. Or should I say merely the most gigantic of the three?

Here is my explanation of the history. Corrections welcomed.

In The Beginning, there was only one international stock market index, MSCI EAFE, and it indexed only developed markets because a) the markets of less-developed or "third world" countries--later on given the marketing-like term "emerging markets"--were insignificant, not reaching even 1% of global market cap until 1988, and nobody cared about them. So, there arose a number of "international stock index" funds from various mutual fund companies that only contained what were later called "developed markets."

The first emerging markets index was created by MSCI in 1988, at which time emerging markets constituted only 1% of global market cap. Emerging markets became respectable. Vanguard launched its Emerging Markets Stock Index Fund in 1994. It launches Total International Stock Market Index Fund in 1997. I'm not sure if it contained emerging markets from the start or not.

As people started to pay attention to emerging markets, there were now "international" funds without emerging markets, "international" funds with emerging markets, and emerging markets funds. Particularly during the "lost decade" of 2000-2009, emerging markets were going gangbusters and they became the latest trendy thing everyone had to have. But of course there is always a contrarian party, and developed markets are different from emerging markets, and whenever two things are different there is always going to be disagreement about which is better, and whether one necessarily wants emerging markets at all, and, if so, how much, etc. etc. So, there continues to be demand for funds that invest only in developed markets. For example... right now, because developed markets have been outperforming emerging markets lately.

At whatever time I started paying attention, Vanguard Total International was a fund-of-funds and consisted of Vanguard European Stock Index, Vanguard Pacific Stock Index, and Vanguard Emerging Markets Stock Index in the right proportions. (In this forum, people occasionally complained that the so-called "total" international fund had "no small-caps, and no Canada.")

I can't find it online, but Vanguard has said publicly that one of the reasons it created and launched VFWIX/VEU, the FTSE All-World Ex-US index fund and ETF, is that it wanted an ETF, and the SEC regulations do not allow an ETF to be composed of a fund-of-funds. VFWIX and VEU were launched in 3/2007. I assume it was a marketing move and a way of filling a hole in the product line while they were doing the perhaps-difficult work of revamping Total International into a fund comprised of individual stocks and thus ETF-able.

VXUS was not launched until 1/26/2011 so VEU did serve a purpose for almost four years. But, at no point has Vanguard ever spotlighted VFWIX as a "core" or "select" fund or used it in their all-in-one funds.

As things stand today, VGTSX now has its VXUS ETF counterpart, and includes small-caps, Canada and all, so it certainly appears as if VFWIX and VEU are redundant. Vanguard's public explanations as I remember them have been somewhat lame and amount to "Well, we offer VGTSX for investors who want the FTSE Global All Cap ex US Index" (or whatever index they used to use), "but for investors who prefer the FSTE All-World Ex-US index, we offer VFWIX, and, gee, choice is good isn't it?" I feel that Vanguard has a number of legacy funds that serve no real purpose, but I can't imagine there would be anything but grief in trying to merge or kill a fund with $22 billion invested in it.

The chief difference between the two is the inclusion of mid-caps and small-caps in VGTSX, but according to Morningstar's style map, VFWIX is 13% mid-caps, 0% small caps, while VGTSX is 19% mid-caps, 4% small caps. It's not a big difference, and if you're enthusiastic about small caps you are going to want more than that anyway.

So, I think what it boils down to is much the same reason I eventually switched from Vanguard 500 Index to Vanguard Total Stock Market Index. If your goal is simply "to own the whole market," then VFWIX is good enough but VGTSX is clearly a slightly more faithful realization of the same goal.
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Topic Author
BenJ
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by BenJ »

Seems like VXUS/VGTSX is the way to go for international. I must have picked up VEU several years ago before VXUS came along. Personally I prefer ETFs, as I can hold the same funds in both Vanguard and TD Ameritrade which makes things simpler. Since VEU/international is down now would be a good time to sell VEU and pick up VXUS, and in the process do some tax loss harvesting and improve diversification. I guess tilting to small caps, as a number on here do, carries similar logic to tilting to US or whatever else has done well recently.

One thing I find odd is VXUS or other well diversified funds hold so little middle east. 1% or so for VXUS. It seems like the middle east would be a larger component of the international market given their oil but maybe a significant portion of it is privately held? Other than this site below, I can't find what percentages of each country or region occupies what percentage of the world market, but if it's right, maybe the middle east is just a small component:
https://www.quandl.com/c/economics/stoc ... by-country
lazyday
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Re: VEU vs VEA vs VXUS splitting hairs...which is better

Post by lazyday »

The world's largest company, maybe worth $10 trillion, is government owned:
http://en.wikipedia.org/wiki/Saudi_Aramco

The index is free float weighted, so if some oil companies in the region do trade, the portions held by governments or privately would be excluded from the index.

Total global free float market cap is maybe $50 trillion.
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