Vanguard's new Total World Stock Index Fund

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Taylor Larimore
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Vanguard's new Total World Stock Index Fund

Post by Taylor Larimore » Thu Jun 26, 2008 10:40 am

Hi Bogleheads:

Today, Vanguard announced it's new "Total World Stock Index Fund."

https://personal.vanguard.com/us/Vangua ... 08_ALL.jsp

Question: If you had a choice which would you own? Why?

Option 1: Total World Stock Fund

Option 2: Total Stock Market Index Fund and FTSE All-World ex US Fund

Thank you and best wishes.
Taylor

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Opponent Process
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Post by Opponent Process » Thu Jun 26, 2008 10:50 am

Option 1: I've moving my TSM and TISM to TWM. I don't wish to fight the market, whether it's in my home country or my home planet.

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Post by avalpert » Thu Jun 26, 2008 10:57 am

Option 2:

At this point I don't see why you would choose option one. It costs more and shouldn't be any more tax effecient and could very well be less tax efficient (unlike with a total U.S. fund that doesn't ahve to sell as companies grow from mid to large; stocks rarely move from one country to another). It also is not a complete replacement for TSM since it does not include small and micro cap stocks.

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Post by gabo » Thu Jun 26, 2008 10:59 am

Option number 2 (TSM + FTSE All-World ex US Fund)
Less ER & no purchase fee.

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Post by IlliniSigEp » Thu Jun 26, 2008 11:01 am

Anyone else notice this on the same page?

Vanguard reduces fees

Vanguard is also reducing fees on the conventional shares of 2 index funds, effective immediately:

* Vanguard FTSE All-World ex-US Index Fund has eliminated its 0.25% purchase fee.
* Vanguard Emerging Markets Stock Index Fund has reduced both its purchase fee and redemption fee from 0.50% to 0.25%.

Nice!

-Dave

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Post by xenial » Thu Jun 26, 2008 11:07 am

Option 2, because it provides control over US versus foreign allocation. I'm fond of market cap weighting in general, but I feel a need to make an exception here. Because of the currency issue, Japanese stocks are riskier than US stocks to a US investor. Of course, US stocks are riskier than Japanese stocks to a Japanese investor. I think a home country (or at least home currency) bias is prudent.

Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.

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Post by Kevin1 » Thu Jun 26, 2008 11:23 am

Option 1. I am a believer in market cap weighting and love the simple elegance of letting the index manage that for me. Especially when it comes to rebalancing across multiple accounts.

Yes, the expenses are a little high right now, but I expect that to be an artifact of the costs being spread over very few shares at startup.

This has me wondering about a two fund portfolio: Total World and one bond fund. Then the equity/fixed allocation and per-fund allocation are precisely the same. Not sure which bond fund I'd use among total, short term, and TIPS.

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Post by PiperWarrior » Thu Jun 26, 2008 11:38 am

Option 2:
  • The weighted average expense ratio is cheaper than Total World Stock.
  • You get domestic small-cap from Total Stock Market.
  • Not all of my equity funds are in a taxable account, but all of my internatinoal exposure is in my taxable account. By putting FTSE All-World ex-US in a taxable account, I get to claim foreign tax credit for all of my international exposure.
  • Putting international stocks in my portfolio according to the world market capitalization subject my portfolio to a lot of currency risk.
  • I may get rebalancing bonus by keeping fixed percentages of domestic and international. (Rick Ferri takes this further and proposes fixed percentages among Europe, Pacific, and emerging markets, but I don't want to go that far because I value simplicity to some extent.)

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Post by stratton » Thu Jun 26, 2008 11:43 am

This new fund supposedly doesn't have small cap stocks.

-US total stock market has small cap stocks.
-Total Intl doesn't have any small cap. Has no Canada.
-FTSE All-World ex-US Index Fund doesn't have small cap, but does have Canada.

If you switch to Total World Stock Index Fund you give up US small cap stocks.

Paul

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Post by diasurfer » Thu Jun 26, 2008 11:50 am

Ken Schwartz wrote:Option 2, because it provides control over US versus foreign allocation. I'm fond of market cap weighting in general, but I feel a need to make an exception here. Because of the currency issue, Japanese stocks are riskier than US stocks to a US investor. Of course, US stocks are riskier than Japanese stocks to a Japanese investor. I think a home country (or at least home currency) bias is prudent.

Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
True, but then you must make the decision of what US/foreign split do I choose with my new-found appreciation of currency risk. I'm fairly educated and have been reading this board for awhile and the subject still makes my head explode. I recall hearing that in the long term, it's a wash. Also, that it's uncompensated risk. But also, the example of the British pound is also used, having never recovered to its early 70's value. Could that be the US dollar?

Currency risk debate is probably part of the reason there is such a wide range of US/foreign recommendations. Using a global fund and letting cap weighting decide is a simple way to acknowledge "I don't know how to treat currency risk" and let the market decide your US/foreign allocation for you, as most of us do in other investment decisions.

That said, I'm 50/50 US/foreign and am undecided about going global.

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Post by financialguy » Thu Jun 26, 2008 12:01 pm

Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk.
I think this is a really good point. I've never read any evidence that currency risk is compensated. According to Larry Swedroe, it is a logical impossibility for it to be compensated.

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Post by Walden » Thu Jun 26, 2008 12:08 pm

Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
And many folks also completely fail to see that currency risk is a knife that cuts both ways. Someone who started investing in the Dollar a few years ago has taken on far more risk in hindsight than someone who was pouring money into the Euro.

Or we have the oft-repeated example of the Japanese investor who didn't have enough foreign exposure and is still paying for that decision.

Currency risk doesn't simply disappear if you tilt heavily to your home country. No one can predict the future.

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Post by avalpert » Thu Jun 26, 2008 12:19 pm

Walden wrote:
Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
And many folks also completely fail to see that currency risk is a knife that cuts both ways. Someone who started investing in the Dollar a few years ago has taken on far more risk in hindsight than someone who was pouring money into the Euro.

Or we have the oft-repeated example of the Japanese investor who didn't have enough foreign exposure and is still paying for that decision.

Currency risk doesn't simply disappear if you tilt heavily to your home country. No one can predict the future.
Yes, but if your investments are in the same currency as your costs you don't have any currency risk (we can talk about the impact of imports on costs but that can be handled through TIPS or other inflation hedges). That is why it is logical to tilt towards your home country - in our case the U.S.

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Post by allsop » Thu Jun 26, 2008 12:22 pm

For me, living in Sweden, it will be choosing among the corresponding ETFs.

Trade commissions are high by American standards (0.15%, min $13, and 0.15% valuta spread as well) so re-balancing between two funds is costly. In addition we have higher capital gains taxes. So I think I will go with just one fund and hope that ER goes down by time.

In any case, this is cheaper than funds I can find here in Sweden.

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Post by jh » Thu Jun 26, 2008 6:22 pm

...
Last edited by jh on Thu Jul 17, 2008 2:20 pm, edited 1 time in total.

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Post by Opponent Process » Thu Jun 26, 2008 6:36 pm

avalpert wrote:
Walden wrote:
Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
And many folks also completely fail to see that currency risk is a knife that cuts both ways. Someone who started investing in the Dollar a few years ago has taken on far more risk in hindsight than someone who was pouring money into the Euro.

Or we have the oft-repeated example of the Japanese investor who didn't have enough foreign exposure and is still paying for that decision.

Currency risk doesn't simply disappear if you tilt heavily to your home country. No one can predict the future.
Yes, but if your investments are in the same currency as your costs you don't have any currency risk (we can talk about the impact of imports on costs but that can be handled through TIPS or other inflation hedges). That is why it is logical to tilt towards your home country - in our case the U.S.
that's never made any sense to me or a lot of other people. if I need american dollars to spend, i can sell shares in my unhedged foreign fund and i will get a check in american dollars (!)...problem solved.

most of us are tying up money for long-term investment. over the long term, currency exchange is a wash. thus, there is no currency risk other than through tracking error, I guess.

if I'm missing something and someone can set me (and others) straight I'd really appreciate it.

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Post by Opponent Process » Thu Jun 26, 2008 6:42 pm

Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
I do deny the existence of currency risk, based on historical data. your last sentence implies it is only an issue of tracking error, which I do respect BTW. but is there any other element of currency risk that isn't purely psychological? otherwise, it just seems like simple jingoism or any other home-country bias.

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Option 2

Post by Laura » Thu Jun 26, 2008 7:32 pm

I would probably go with option 2 because many 401k plans have good, low cost US equity options but really horrible and costly international funds. By holding US and international separately it is easier to use the lower cost international in taxable and the low cost US fund in a 401k.

Retirement plans change and if someone has US and intl in one taxable fund it could be more difficult to maintain a desired asset allocation without adding a bunch of new funds in the future.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

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Post by asset_chaos » Thu Jun 26, 2008 8:38 pm

I do have a choice, and I have this evening invested in the Total World Stock Index Fund. However, I will not be selling my investments in tax-managed growth/income and international to put everything into total world; the embedded capital gains don't permit that. Why? No surprising reasons: I have no investment insight, so I'll take the entire capital markets as my preferred default portfolio.

The argument against the extra cost doesn't bother me greatly because I'm confident Vanguard will lower costs as assets rise. The argument about bailing when currencies shift doesn't bother me because if I haven't done it in the last 20 years, I probably won't start now. And the argument about there not being small caps doesn't bother me---although I'd prefer them to be in this fund from the start---because Vanguard already has in the prospectus the option for the fund board to switch to an index with broader market coverage. And, if total world stock index gets big enough, I believe they will. So the cost will decrease and market coverage increase as assets grow; I think that's a good thing, so I'll help it along.

As for wanting one's portfolio predominantly in the currency of one's bills, I think that's a completely legitimate concern. However, I think the argument fails when it's confined to subsets of a portfolio, e.g. applying the argument to stocks only. If you had a 50/50 portfolio of total world stock and total bond market, the portfolio would be more than 70% in US dollar denominated financial markets. It's the total portfolio that matters to this question about matching the currency of liabilities.
Regards, | | Guy

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Post by Opponent Process » Thu Jun 26, 2008 8:49 pm

asset_chaos wrote:As for wanting one's portfolio predominantly in the currency of one's bills, I think that's a completely legitimate concern.
why?

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VEU+VTI=cheaper+US small cap+more flexibility

Post by zane » Thu Jun 26, 2008 8:51 pm

I've been struggling with this question since the total world announcement earlier this year, and ultimately ended up consolidating all of my taxable account into VEU and VTI at market cap ratios (55%, 45% respectively) because of the hard-to-beat 0.17% combined ER, the US small cap exposure, and the flexibility to put the domestic into a retirement plan (should I ever have a decent retirement plan...). One Fund to Rule Them All is certainly attractive aesthetically, but I think not quite there functionally.

On the currency issue... I guess I still don't understand (or buy) the home-market bias. I mean, nobody's happy to be overweight their own currency when it collapses (Germany post WWI, Russia in 1998, Argentina 1999, etc...) even if they do have to buy food using that currency. If anything, it seems like you'd want to be underweight your own currency doesn't it? Since that's what you get paid in, and what your house will always be valued in, etc. In the same way that it's a little nuts to load up your retirement account with stock from your employee purchase plan... so that when they go bankrupt, you lose both your savings and your job?
Okay, that's enough: I'm no longer down on my knees, praying for a crash...

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Option 2

Post by RandalThor » Thu Jun 26, 2008 9:17 pm

Thanks for posting that Taylor, great news!

I will stick with TSM and the FTSE. Easier for me to maintain my desired asset allocation.

I don't quite understand all the currency risks here, but since our dollar has been so devalued recently, is it not a good time to load up more in U.S. (vs. Intl), awaiting a surge in valuation in the future?
Last edited by RandalThor on Thu Jun 26, 2008 9:26 pm, edited 1 time in total.

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Re: Vanguard's new Total World Stock Index Fund

Post by HerbertSitz » Thu Jun 26, 2008 9:21 pm

Taylor Larimore wrote: Option 1: Total World Stock Fund

Option 2: Total Stock Market Index Fund and FTSE All-World ex US Fund
Isn't a third option to buy four funds to cover roughly the same territory: TSM Index, European Index, Pacific Index, and EM Index? Expenses on Europe and Pacific funds are about 0.20% and on EM about 0.37%. I can't see how an investor could justify the 0.40% expense for FTSE All World ex US, which is almost double the three fund counterpart's blended fee.
Last edited by HerbertSitz on Thu Jun 26, 2008 9:22 pm, edited 1 time in total.

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Post by joe8d » Thu Jun 26, 2008 9:21 pm

Ken said:

Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.

Ken is absolutely right on that.
All the Best, | Joe

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Post by tetractys » Thu Jun 26, 2008 9:22 pm

Option 2:

1. A heck of a lot cheaper.
2. Way more diversified. (The Total World Stock Index only holds about 2/3 of the stocks of Total Stock Market alone, and only a smidgen more than FTSE All-World ex-US alone.)

Best, Tet
Last edited by tetractys on Thu Jun 26, 2008 9:34 pm, edited 2 times in total.
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Post by avalpert » Thu Jun 26, 2008 9:28 pm

Opponent Process wrote:
Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
I do deny the existence of currency risk, based on historical data. your last sentence implies it is only an issue of tracking error, which I do respect BTW. but is there any other element of currency risk that isn't purely psychological? otherwise, it just seems like simple jingoism or any other home-country bias.
Check out this chart of Canadian/US currency exchange rate. Coincidently, it is about at the same point as 38 years ago, but if you take any random 10 year period on there - how can you not expect to have some currency risk? Now, of course risk can lead to reward, but since this is uncompensated by the market, that reward must be a matter of luck not an expectation.

So, the two possiblities are you get lucky and have higehr returns because of the strengthening currency your investments are in while your home country costs remain lower or you get unlucky and as your investment currency is dragging down the returns on the compensated risks you took the prices in your home curency are inflating faster relative to the investment currency.

Of the two possibilities that I can't predict I would rather gaurd against the downside than hope for the upside here. Companies don't engage currency hedging for nothing.

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Post by Opponent Process » Thu Jun 26, 2008 10:17 pm

avalpert wrote:
Opponent Process wrote:
Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
I do deny the existence of currency risk, based on historical data. your last sentence implies it is only an issue of tracking error, which I do respect BTW. but is there any other element of currency risk that isn't purely psychological? otherwise, it just seems like simple jingoism or any other home-country bias.
Check out this chart of Canadian/US currency exchange rate. Coincidently, it is about at the same point as 38 years ago, but if you take any random 10 year period on there - how can you not expect to have some currency risk? Now, of course risk can lead to reward, but since this is uncompensated by the market, that reward must be a matter of luck not an expectation.

So, the two possiblities are you get lucky and have higehr returns because of the strengthening currency your investments are in while your home country costs remain lower or you get unlucky and as your investment currency is dragging down the returns on the compensated risks you took the prices in your home curency are inflating faster relative to the investment currency.

Of the two possibilities that I can't predict I would rather gaurd against the downside than hope for the upside here. Companies don't engage currency hedging for nothing.
I could see how that might apply to someone about to retire, or someone who is spending their portfolio. But for the long term investor, since currency fluctuations are a wash (equal parts good and bad luck), I'd think you'd want to diversify your currency holdings.

I'd also expect that most retirees would have the vast majority of their money in local currencies in the form of domestic bonds & money markets, etc.

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Post by avalpert » Thu Jun 26, 2008 10:24 pm

Opponent Process wrote: I could see how that might apply to someone about to retire, or someone who is spending their portfolio. But for the long term investor, since currency fluctuations are a wash (equal parts good and bad luck), I'd think you'd want to diversify your currency holdings.

I'd also expect that most retirees would have the vast majority of their money in local currencies in the form of domestic bonds & money markets, etc.
I would suggest that the longterm here is indeterminitely long. Currency rates are rarely at that breakeven longterm point (it is rarely a wash) and it is unlikely that, no matter your time frame, it will be when you need it for expenditures.

You should diversify your market exposure but you must recognize the currency exposure you are taking on as a result as mitigate it.

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Post by NYCPete » Thu Jun 26, 2008 10:40 pm

I whole heartedly choose option 1. It's simple, and it aligns with my belief that the markets are smarter than I am. To use a slightly modified Bogle quote, it is...

"The only way to guarantee your fair share of [Global] stock market returns."
asset_chaos wrote: ...The argument against the extra cost doesn't bother me greatly because I'm confident Vanguard will lower costs as assets rise. The argument about bailing when currencies shift doesn't bother me because if I haven't done it in the last 20 years, I probably won't start now. And the argument about there not being small caps doesn't bother me---although I'd prefer them to be in this fund from the start---because Vanguard already has in the prospectus the option for the fund board to switch to an index with broader market coverage. And, if total world stock index gets big enough, I believe they will. So the cost will decrease and market coverage increase as assets grow; I think that's a good thing, so I'll help it along...
These are all excellent points, and if anyone is skeptical if any of those things are going to happen for the Total World Fund, I'd like to point out a few examples of Vanguard Funds that were altered or changed for the better long after they were initially opened:

-Vanguard's Small Cap Value Index Fund used to have a purchase fee, and now doesn't.
-Vanguard's Total Stock Market Fund in recent years changed the index it tracked.
-The Target Retirement Funds added emerging markets after they had been out for awhile.
-Both the Emerging Markets and FTSE All World ex. US funds either lowered or eliminated purchase fees.

I have no reason to think Vanguard will not continue to improve this fund to make it a one stop shop for my equity investments.

Regarding the currency issue...
I say this with utmost respect to the intelligent comments people have posted on currency risk: I have yet to see someone display a quantifiable way to measure currency risk to the extent that the measurement can help set U.S./Int'l allocations (and U.S./Int'l allocations are all over the map on this forum!). Until then, the currency-risk issue is a non-starter(IMHO).

Best,
Peter
To the extent that a fool knows his foolishness, | He may be deemed wise | A fool who considers himself wise | Is indeed a fool. | | Buddha

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Post by avalpert » Thu Jun 26, 2008 10:48 pm

NYCPete wrote:I whole heartedly choose option 1. It's simple, and it aligns with my belief that the markets are smarter than I am. To use a slightly modified Bogle quote, it is...

"The only way to guarantee your fair share of [Global] stock market returns."
asset_chaos wrote: ...The argument against the extra cost doesn't bother me greatly because I'm confident Vanguard will lower costs as assets rise. The argument about bailing when currencies shift doesn't bother me because if I haven't done it in the last 20 years, I probably won't start now. And the argument about there not being small caps doesn't bother me---although I'd prefer them to be in this fund from the start---because Vanguard already has in the prospectus the option for the fund board to switch to an index with broader market coverage. And, if total world stock index gets big enough, I believe they will. So the cost will decrease and market coverage increase as assets grow; I think that's a good thing, so I'll help it along...
These are all excellent points, and if anyone is skeptical if any of those things are going to happen for the Total World Fund, I'd like to point out a few examples of Vanguard Funds that were altered or changed for the better long after they were initially opened:

-Vanguard's Small Cap Value Index Fund used to have a purchase fee, and now doesn't.
-Vanguard's Total Stock Market Fund in recent years changed the index it tracked.
-The Target Retirement Funds added emerging markets after they had been out for awhile.
-Both the Emerging Markets and FTSE All World ex. US funds either lowered or eliminated purchase fees.

I have no reason to think Vanguard will not continue to improve this fund to make it a one stop shop for my equity investments.

Regarding the currency issue...
I say this with utmost respect to the intelligent comments people have posted on currency risk: I have yet to see someone display a quantifiable way to measure currency risk to the extent that the measurement can help set U.S./Int'l allocations (and U.S./Int'l allocations are all over the map on this forum!). Until then, the currency-risk issue is a non-starter(IMHO).

Best,
Peter
How can a fund that excludes small caps be giving you your fair share of the market returns? I too expect it will improve over time both in cost and construction - and I will be happy to revisit it when it does. I don't feel the need to be one of the early adopters who pays higher prices for others to have it better later on.

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Post by diasurfer » Thu Jun 26, 2008 10:59 pm

NYCPete wrote: Regarding the currency issue...
I say this with utmost respect to the intelligent comments people have posted on currency risk: I have yet to see someone display a quantifiable way to measure currency risk to the extent that the measurement can help set U.S./Int'l allocations (and U.S./Int'l allocations are all over the map on this forum!). Until then, the currency-risk issue is a non-starter(IMHO).

Best,
Peter
This is exactly what I was saying much earlier in this thread. The typical back and forth about currency risk followed. My head is still exploded thinking about currency risk, and still I ask - how am I to account for it in my AA? My 50/50 US/foreign AA already has home country bias since it's not 40/60. So have I adequately accounted for currency risk?

tetractys wrote: Way more diversified. (The Total World Stock Index only holds about 2/3 of the stocks of Total Stock Market alone, and only a smidgen more than FTSE All-World ex-US alone.)
Excellent point. This point alone is enough to keep me in two funds.

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Post by NYCPete » Thu Jun 26, 2008 11:15 pm

avalpert wrote:
NYCPete wrote:I whole heartedly choose option 1. It's simple, and it aligns with my belief that the markets are smarter than I am. To use a slightly modified Bogle quote, it is...

"The only way to guarantee your fair share of [Global] stock market returns."
asset_chaos wrote: ...The argument against the extra cost doesn't bother me greatly because I'm confident Vanguard will lower costs as assets rise. The argument about bailing when currencies shift doesn't bother me because if I haven't done it in the last 20 years, I probably won't start now. And the argument about there not being small caps doesn't bother me---although I'd prefer them to be in this fund from the start---because Vanguard already has in the prospectus the option for the fund board to switch to an index with broader market coverage. And, if total world stock index gets big enough, I believe they will. So the cost will decrease and market coverage increase as assets grow; I think that's a good thing, so I'll help it along...
These are all excellent points, and if anyone is skeptical if any of those things are going to happen for the Total World Fund, I'd like to point out a few examples of Vanguard Funds that were altered or changed for the better long after they were initially opened:

-Vanguard's Small Cap Value Index Fund used to have a purchase fee, and now doesn't.
-Vanguard's Total Stock Market Fund in recent years changed the index it tracked.
-The Target Retirement Funds added emerging markets after they had been out for awhile.
-Both the Emerging Markets and FTSE All World ex. US funds either lowered or eliminated purchase fees.

I have no reason to think Vanguard will not continue to improve this fund to make it a one stop shop for my equity investments.

Regarding the currency issue...
I say this with utmost respect to the intelligent comments people have posted on currency risk: I have yet to see someone display a quantifiable way to measure currency risk to the extent that the measurement can help set U.S./Int'l allocations (and U.S./Int'l allocations are all over the map on this forum!). Until then, the currency-risk issue is a non-starter(IMHO).

Best,
Peter
How can a fund that excludes small caps be giving you your fair share of the market returns? I too expect it will improve over time both in cost and construction - and I will be happy to revisit it when it does. I don't feel the need to be one of the early adopters who pays higher prices for others to have it better later on.
According to the FTSE site, the FTSE All-World Index covers 98% of the world's investable market capitalization. Anyone is free to fret over 2%, by adding a U.S. small cap index, and get 1% more. The other 1% will not be available until Vanguard expands the Total World Fund or they start an Int'l small cap fund. To be fair, a 100% "fair share" is not actually possible, even with VTSMX*. It only covers 99.5%! :D

Personally, I'm not going to lose any sleep over the small cap issue if I can simply add a US small cap fund to my portfolio until the Total World Fund starts to include them.

Best,
Peter

*Addendum: 100% "fair share" is not available at Vanguard. If I recall correctly, Fidelity's Spartan total U.S. market fund covers ~100% b/c it tracks the Wilshire 5000.
Last edited by NYCPete on Fri Jun 27, 2008 7:17 am, edited 1 time in total.
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D. Swenson on Foreign Currency Exposure

Post by docneil88 » Thu Jun 26, 2008 11:16 pm

NYCPete wrote:I have yet to see someone display a quantifiable way to measure currency risk to the extent that the measurement can help set U.S./Int'l allocations (and U.S./Int'l allocations are all over the map on this forum!). Until then, the currency-risk issue is a non-starter(IMHO).
Good point. Here's something relevant said by David Swenson, Ph.D. & Chief Investment Officer of the Yale Endowment:
Fortunately, finance theorists conclude that some measure of foreign exchange exposure adds to portfolio diversification. Unless foreign currency positions constitute more than roughly one-quarter of portfolio assets, currency exposure serves to reduce overall portfolio risk. Beyond a quarter of portfolio assets, the currency exposure constitutes a source of unwanted risk. [Source: p.60 of Unconventional Success: A Fundamental Approach to Personal Investment.]
Unfortunately, I don't know which "finance theorists" he is referring to, and I don't know what statistics they used to arrive at the "one quarter of portfolio assets" conclusion. Best, Neil

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Post by Gregory » Thu Jun 26, 2008 11:40 pm

stratton wrote:This new fund supposedly doesn't have small cap stocks.

-US total stock market has small cap stocks.
-Total Intl doesn't have any small cap. Has no Canada.
...

If you switch to Total World Stock Index Fund you give up US small cap stocks.

Paul
Is there a meaningful amount of small cap exposure to differentiate TSM from a purely large-cap offering?

Regarding TSM funds, Travis Morien is on record as stating:

"There are critics though, and I am one of them, that think perhaps investors are not quite getting what they expect. For a start, the holdings in the index funds are market capitalisation weighted. This sounds sensible of course except when you consider just how much the biggest companies dominate the portfolio. The top one hundred stocks in America, representing just 3% of the number of stocks in the index funds actually account for over 60% of the funds invested in Vanguard's fund.

When you get down to the genuinely small capitalisation stocks there is actually very little money invested in each stock, which is why it probably isn't surprising that over long periods of time the Wilshire 5000 index performs pretty much the same as the big capitalisation growth stock dominated S&P500 index."

http://tinyurl.com/6f9r9q

IMHO anyone expecting to extract any meaningful small cap exposure from a TSM fund has embarked upon a fool's errand. (Yes, TSM has the market weight of small-cap stocks (a soupcon), but not enough to differentiate TSM's total return from a purely large-cap offering.)

Greg
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Post by stratton » Fri Jun 27, 2008 1:04 am

Gregory wrote:
stratton wrote:This new fund supposedly doesn't have small cap stocks.

-US total stock market has small cap stocks.
-Total Intl doesn't have any small cap. Has no Canada.
...

If you switch to Total World Stock Index Fund you give up US small cap stocks.

Paul
Is there a meaningful amount of small cap exposure to differentiate TSM from a purely large-cap offering?
The total stock market is ~75% +/-5%. Those large cap stocks are the S&P 500. The rest is "extended market and its 2/3 midcap and 1/3 small cap. So you're looking at 2000+ stocks in those smaller companies. The extended market can add some extra returns such as over the last five or six years. During the 90s they probably were a drag.

Paul

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Post by kaikaun » Fri Jun 27, 2008 8:17 am

Whether or not "currency risk" is a factor depends on your definition of risk. If you define risk as short-term volatility and tracking error, then "currency risk" exists and is uncompensated. However, if risk is instead defined as variability of long-term total return, then "currency risk" is very slight.

I do not care about the short-term volatility of the equity portion of my portfolio. In fact, higher volatility is welcome since it has the potential to increase the rebalancing bonus. Therefore unhedged international equity has no currency risk to me.

Conversely, I do care about the short-term volatility of the bond portion of my portfolio. This asset class does have currency risk to me, so it has to be hedged away or simply avoided.

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Post by mithrandir » Fri Jun 27, 2008 8:38 am

Ken Schwartz wrote:When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
I wouldn't be so sure about that. The world is awash with Dollars and the Fed is working overtime printing even more greenbacks to maintain consumer spending. We know real income growth (for middle-class wage-earners) have been negative for a few years and it has become more negative today. Oil is now over $142 and will continue to rocket upward as long as the US currency spigots flow with such vigor.

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Post by Quidnam » Fri Jun 27, 2008 9:39 am

I think asset_chaos and NYCPete have great points -- there's really no reason to think that the expenses are not going to go down significantly over time, and that the underlying index will not be expanded to include an "all cap" sampling of global equity markets. Sounds good to me...

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Post by Cosmo » Fri Jun 27, 2008 10:03 am

Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
Of course there is currency risk here. But this has nothing to do with the OP.

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Post by looking » Fri Jun 27, 2008 10:08 am

wonder someone post the holding of WORLD INDEX FUND

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Taylor Larimore
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Holdings of World Stock Fund ?

Post by Taylor Larimore » Fri Jun 27, 2008 10:32 am

tomser wrote:wonder someone post the holding of WORLD INDEX FUND

Hi Tomser:

Sorry, that's impossible in our limited space. Total World Stock Fund holds approximately 2,900 stocks in 47 countries.

Best wishes.
Taylor

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Post by xenial » Fri Jun 27, 2008 10:56 am

Cosmo wrote:
Ken Schwartz wrote:Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
Of course there is currency risk here. But this has nothing to do with the OP.
Sure it does. By selecting the one fund solution, an investor chooses to weight global equities by market cap. The two fund approach allows the possibility of overweighting the US to reduce currency risk.

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Post by Quidnam » Fri Jun 27, 2008 11:08 am

Ken Schwartz wrote:By selecting the one fund solution, an investor chooses to weight global equities by market cap. The two fund approach allows the possibility of overweighting the US to reduce currency risk.
Is single-country risk or home-country risk compensated? Or is it somehow acceptable only in the case of the U.S.?

For someone making a long-term global cap-weighted equity investment, short-term currency fluctuations should be a wash, while longer term trends should be captured in the free float. On the other hand, someone making the affirmative decision to overweight a particular country or currency risks making the wrong bet.

Am I missing something?

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Post by Heath » Fri Jun 27, 2008 11:08 am

Ken Schwartz wrote: Many folks advocating a world market cap approach seem to be denying the existence of currency risk. This effect is undoubtedly due to the dollar's poor performance in recent times. When the dollar rallies (as it inevitably will, sooner or later), these investors will be hurting, and many are going to bail out.
That statement is market timing. If one does not believe in market timing, then the dollar is priced right today and there is no more reason to believe that it will go up than it will go down. Personally I have no problem if one does wish to market time and predict the future value of the dollar. But if that is what is intended, then state the reasons why you believe the dollar will rise and then this matter can be debated.

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Post by DaveTH » Fri Jun 27, 2008 11:21 am

There seems to be some very inconsistent advice regarding international equity allocations. I don't quite understand why Mr. Bogle, Mr. Ferri and others highly advocate owning the Total Stock Market index while at the same time they have a different strategy regarding international equities. Either you believe in owning total markets or you don't.

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Re: Vanguard's new Total World Stock Index Fund

Post by linenfort » Fri Jun 27, 2008 11:26 am

Taylor Larimore wrote: Question: If you had a choice which would you own? Why?
Taylor
I certainly do have a choice, and I will stick with Total and exUS
as separate holdings rather than the new Total World product.

If they grow far apart in market value, I can rebalance.

These are actually held as ETFs in my account (VTI and VEU) and I can't,
for the life of me, figure out why I pay no commissions on VTI purchases
and regular commissions on VEU buys (as posted in the 'To ETF or not to ETF' thread).

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Post by Opponent Process » Fri Jun 27, 2008 11:32 am

DaveTH wrote:There seems to be some very inconsistent advice regarding international equity allocations. I don't quite understand why Mr. Bogle, Mr. Ferri and others highly advocate owning the Total Stock Market index while at the same time they have a different strategy regarding international equities. Either you believe in owning total markets or you don't.
just like other decisions in life, people allocate their portfolios based on both logic and psychology. home-country bias exists everywhere. maybe some of the younger Bogleheads are a little more cynical or just not as blind to the fact that the country they reside in is prone to its own "risks".

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Post by avalpert » Fri Jun 27, 2008 11:50 am

Quidnam wrote:
Ken Schwartz wrote:By selecting the one fund solution, an investor chooses to weight global equities by market cap. The two fund approach allows the possibility of overweighting the US to reduce currency risk.
Is single-country risk or home-country risk compensated? Or is it somehow acceptable only in the case of the U.S.?

For someone making a long-term global cap-weighted equity investment, short-term currency fluctuations should be a wash, while longer term trends should be captured in the free float. On the other hand, someone making the affirmative decision to overweight a particular country or currency risks making the wrong bet.

Am I missing something?
I don't think you fully apprecaite the nature of the risk - it is not that currency moves up and down. The risk is that the currency your assets are in move down while the currency your liabilities will be in move up. Thus, if you keep your assets and liabilities in the same currency (tilt towards your home country) you are not exposed to this risk.

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Post by Quidnam » Fri Jun 27, 2008 1:32 pm

avalpert wrote: I don't think you fully apprecaite the nature of the risk - it is not that currency moves up and down. The risk is that the currency your assets are in move down while the currency your liabilities will be in move up. Thus, if you keep your assets and liabilities in the same currency (tilt towards your home country) you are not exposed to this risk.
If we are looking at equities over a long time horizon, the opposite is just as likely to happen, making the overall effect a wash. Presumably a long-term investor isn't trying to cover his current liabilities with the present-day currency value of his equity investments. In this light, I fail to see how a tilt toward the home country (or any country) is anything other than market timing or regional bet.

The flip side of tilting towards your home country is the other type of risk you're taking on. A currency crisis or decades of economic trouble would be a serious issue for any society. Even if all your assets and liabilities were there in the same currency, you might find yourself wishing they weren't.

Overweighting one's home country might make sense if the time horizon for economic systems, societies, and countries-of-residence were infinite. History provides enough examples to think that this may not be the case, even (or especially) for hegemons. I would imagine that global investing makes the most sense for those of us who may find it advisable to remain agnostic about the potential location of one's assets and liabilities.

If things got to the point where US equities represented 5% of the world's market capitalization, maybe I'd want some flexibility. If the US roared back above 50%, I'd still be happy. And the same should be true pretty much anywhere in between.

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Post by avalpert » Fri Jun 27, 2008 1:57 pm

Quidnam wrote:
If we are looking at equities over a long time horizon, the opposite is just as likely to happen, making the overall effect a wash. Presumably a long-term investor isn't trying to cover his current liabilities with the present-day currency value of his equity investments. In this light, I fail to see how a tilt toward the home country (or any country) is anything other than market timing or regional bet.
Your thinking of it the wrong way - it is insurance/hedging. Yes, at any point in time (short term or long term) the effect can be in either direction - this does not make it a wash, it does not average out to zero for the investor it either is positive or negative adn we can create ana anlysis of the likely magnitude in each direction but to say it averages to zero is an accounting trick and not reality.

If you happen to be in the positive position (your assets are in a currency that has apprecaited while liabilities in a currency that depreciated) when you need the funds all the better. But if you are in the negative position you will not be able to count on the expected returns to cover your expenses. Depending on how you approach insurance decisions this is one of those scenarios that typically warrants hedging away the exposure.

I would imagine that global investing makes the most sense for those of us who may find it advisable to remain agnostic about the potential location of one's assets and liabilities.
Global investing makes sense for everyone - there are diversification benefits to be had. But taking on unneccesary currency exposure is only for people speculating in currencies (I would suggest it is the unhedged position that is truly market timing). Given costs and diversification benefits you need to figure out how much exposure to take on, but I think the numbers still favor tilting towards your home country (this may not be true for some countries but I would think it is for all large, liquid, currencies).

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