Approximating total international stock market

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 shows how you can combine funds to mimic the composition of the international stock market. Funds can be mutual funds, index funds or exchange-traded funds (ETFs).

Investors who want to invest in the Vanguard Total International Stock Market Index Fund often face a situation where they have to approximate it with the funds available in their employer sponsored plans, perhaps also using funds in other accounts, for example a Roth IRA. Thrift Savings Plan investors, for example, face this issue with the I Fund (based on MSCI EAFE index), which lacks emerging markets, small-cap stocks, and Canadian stocks.

Total international stock market index
This table shows Total International Stock Market Index Funds from two providers. The aim is to approximate these stock style boxes using available funds chosen from the two-fund and EAFE tables below.

Approximating total international stock with two funds
These examples match the composition of the total international stock market using two funds.

Developed and emerging market country classifications vary depending on the index provider. For this reason, it is best if you use both funds from the same provider, as shown in the last three examples above.

Approximating total international stock with an EAFE fund
These examples were designed specifically if you need to use a Europe, Australasia and Far East (EAFE) index fund, such as the TSP I Fund or the Schwab International Index Fund (SWISX). They show how you can combine an EAFE fund with other funds to match the composition of the total international stock market.

The MSCI EAFE index does not include:
 * Emerging markets
 * International small-caps
 * Canadian stocks

You may want to use one of the two boxes depending on whether you have access to an MSCI or FTSE emerging markets index fund. MSCI classifies South Korea as an emerging market, while FTSE considers it a developed market ; this is why box 2 uses a separate South Korea index fund.

The blended expense ratios of the two boxes are 0.10% and 0.12% respectively, assuming that the I Fund (0.055%) takes the place of the MSCI EAFE index fund. You can reduce the expense ratios by using the Franklin FTSE Canada ETF (FLCA) (0.09%) and Franklin FTSE South Korea ETF (FLKR) (0.09%). These are smaller and more lightly traded than their iShares equivalents, meaning a larger bid/ask spread, but they have much lower expense ratios.

To hold the portfolio in box 1 in the recommended percentage, using the Admiral Class share of the [ Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSAX)], the minimum amount you would need for all four funds together is $30,000. This is because 10% of that amount equals the $3,000 fund minimum for VFSAX. Of that $30,000, at least $12,600 must be in the IRA to hold the three funds, with the remaining $17,400 in the I Fund. You can avoid this by owning ETF share classes of the Vanguard FTSE All-World ex-US Small Cap Index.

Canadian investors
For Canadians, most Registered Retirement Savings Plans have a brokerage function that let you purchase of securities based in the United States. Consider investing in [ Vanguard Total World Stock Index ETF] which samples securities from throughout the entire investable world market. You could then use Vanguard MSCI Canada Index ETF and iShares S&P/TSX Completion Index Fund to balance to your desired domestic exposure.

Methodology
All the above collections of funds were weighted in a manner to approximate the Morningstar Style Box, average market cap, and industry and regional weightings of the [ Vanguard Total International Stock ETF (VXUS) (0.08%)].

The collection of funds making up the first box in the EAFE table is weighted in the following way:


 * Small-cap stocks are weighted at 10% per Vanguard FTSE All-World ex-US Small-Cap Index.
 * Canadian stocks are 6.6% of Vanguard's Total International Stock ETF and 14.8% of Vanguard's FTSE All-World ex-US Small Cap ETF. Given that Vanguard's international small cap fund overlaps the total international market fund, it was decided to weight the Canadian MSCI fund at 5% of the overall collection of funds (which is 6.6% - (14.8% * 10%)).
 * Emerging markets (per MSCI) are 29.6% of Vanguard's Total International Stock ETF, and are 28.3% of the Vanguard FTSE All-World ex-US Small-Cap ETF. Given that these funds overlap, the MSCI Emerging Markets ETF was weighted at 27% (which is 29.6% - (28.3% * 10%)).
 * Europe, Australasia, and the Far East (EAFE) is everything left over, which is 58%. The MSCI EAFE index fund is a proxy for the I Fund, Schwab International Index Fund (SWISX) or any MSCI EAFE fund.

Region and sector comparison
When Vanguard's International Total Stock ETF and the collection of funds were compared in Morningstar's X-Ray's different measurements, both were similar. For example, X-Ray compared the geographic regions as (rounded to the nearest 1%):

When X-Ray compares the stock sectors, the numbers (rounded to the nearest 1%) are:

These percentages were last updated on May 30, 2021.