Approximating total international stock market

Investors wishing to invest in 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 and quite possibly some other funds available in other accounts such as 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 caps, and Canadian stocks.

This page shows an example of approximating Vanguard Total International Stock Market Index Fund with funds covering specific parts of the market.

Examples
{|border=1 cellpadding=7 !Funds !Morningstar Style Box
 * - style="background:#f0f0f0;"
 * 100% (VGTSX) (0.22%)
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 * For TSP I Fund Investors or any investor with a MSCI EAFE Index fund: 62% Vanguard Developed Markets Index Fund (VDMIX) (0.20%) 20% Vanguard Emerging Markets Stock Index (VEIEX) (0.33%) 11% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.50%) 7% iShares MSCI Canada Index (ETF) (EWC) (0.50%) ''Note: see  TSP I Fund investors below for explanations.
 * For TSP I Fund Investors or any investor with a MSCI EAFE Index fund: 62% Vanguard Developed Markets Index Fund (VDMIX) (0.20%) 20% Vanguard Emerging Markets Stock Index (VEIEX) (0.33%) 11% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.50%) 7% iShares MSCI Canada Index (ETF) (EWC) (0.50%) ''Note: see  TSP I Fund investors below for explanations.
 * For TSP I Fund Investors or any investor with a MSCI EAFE Index fund: 62% Vanguard Developed Markets Index Fund (VDMIX) (0.20%) 20% Vanguard Emerging Markets Stock Index (VEIEX) (0.33%) 11% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.50%) 7% iShares MSCI Canada Index (ETF) (EWC) (0.50%) ''Note: see  TSP I Fund investors below for explanations.


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 * }
 * These percentages were computed on 23 June 2012.
 * The style box numbers were computed by Morningstar Instant XRay.
 * The style box numbers were computed by Morningstar Instant XRay.

TSP I Fund investors
The second collection of funds above was designed specifically for TSP I Fund investors who need to hold all or some of their TSP in the I Fund, or for any investors who need to hold assets in a MSCI EAFE fund.

The I Fund tracks the MSCI EAFE index which does not include:
 * International Small-Caps
 * Emerging markets
 * Canadian stocks

The collection of funds making up the second box ("For TSP I Fund Investors") is weighted in the following way :


 * Small-cap stocks are weighted at 11% per Vanguard_FTSE_All-World_ex-US_Small-Cap_Index_Fund.
 * Canadian stocks are 8.6% of Vanguard's Total International Stock Market Index Fund and 14.8% of Vanguard's FTSE All-World ex-US Small Cap Index Fund . Given that Vanguard's international small cap fund overlaps the total international market fund, it was decided to weight the Canadian MSCI fund at 7% of the overall collection of funds (which is 8.6% - (14.8% * 11%)).
 * Emerging markets are 23% of Vanguard Total International Stock Market Index Fund, and are 26% of the Vanguard FTSE All-World ex-US Small-Cap Index Fund . Given that these fund overlap, the Emerging Markets Index Fund was weighted down from 23% to 20% owing to the fact that the 2.75% of the 11% held in the small cap index fund is contained in emerging markets (26% of 11% = 2.75%).
 * Developed markets is everything left over, which is 62%. The developed markets index fund is a proxy for the I Fund or any MSCI EAFE fund.

When Vanguard's International Total Stock Market Index Fund and the collection of four funds were compared in Morningstar's X-Ray's different measurements, both were similar. For example, X-Ray compared the geographic regions as:

When X-Ray compares the stock sectors, the numbers are:

The blended expense ratio for this collection of four funds, assuming that the I Fund takes the place of the developed markets fund and that the Vanguard emerging market index fund is held in the Admiral share class, is 0.15%, slightly less than the 0.18% expense ratio for the Admiral share class of Vanguard Total International Stock Market Index Fund. If the Vanguard emerging market index fund is in the investor share class, then the blended expense ratio is 0.18%.

Note that to hold such a portfolio in the recommended percentage, the minimum amount needed for all four funds together is around $27,500, as 11% of that amount is just above the $3,000 fund minimum to open Vanguard FTSE All-World ex-US Small Cap Index fund. Of that $27,500, at least $10,500 must be in the IRA to hold the three funds, with the remaining $17,000 in the I Fund.