Vanguard international funds FAQ

With Vanguard currently offering several broad international index funds, some investors may wonder what they should buy in their portfolios. Here is an attempt to address frequently asked questions about these funds.

= Basic questions =

What broad international index funds does Vanguard have?

 * Vanguard Total International Stock Index Fund
 * Vanguard FTSE All-World ex-US Index Fund
 * Vanguard Tax-Managed International Fund

Should I buy Total International or FTSE All-World ex-US?
Both funds are broadly diversified international index funds, which include both developed and emerging market stocks. With the imminent change in the Total International tracking index to the MSCI All Country World ex USA Investable Market Index, the Total International Index fund will provide access to large cap, mid cap, and small cap international stocks. The FTSE All-World ex-US Index fund covers large cap and mid cap stocks. . See International Global ex U.S. Market Index Returns for returns data on the tracking indices.

FTSE All-World ex-US

 * Tax efficient. Its dividends were 87.23% qualified in 2007; 73.82% in 2008; and 76.55% in 2009. The fund is eligible for the foreign tax credit. It's very unlikely to distribute capital gains in the event that a country (think South Korea) moves out of emerging markets and joins developed markets.
 * The investor share expense ratio (0.35%) is higher than that of Total International (0.26%)
 * Vanguard is expected to lower the expense ratio as the fund grows. Historically, Vanguard has been good at reducing the expense ratio as the fund grows. (For example, check out the expense ratio history of the European,  Pacific, and  Emerging Market index funds.)
 * The fund will offer admiral shares starting September 2011, with an expense ratio of 0.18%.
 * Covers large cap and mid cap stocks. Includes Canada.

Total International

 * The fund has been slightly less tax efficient compared to the FTSE All-World ex-US fund. Its dividends were 74.31%  qualified in 2007; 79.69% in 2008; and 69.75% in 2009. However, these tax-efficiency numbers may show a meaningful change starting with the 2009 fiscal year since the fund has transitioned from holding other funds to directly holding individual securities. This transition to holding individual securities would also open up the ability to pass through foreign taxes paid on the directly held securities, further blurring the distinctions between the two funds.
 * The expense ratio (0.26%) is lower than that of FTSE All-World ex-US (0.35%).
 * Offers admiral shares (expense ratio 0.20%).
 * Covers large cap, mid cap and small cap stocks. Includes Canada.

Should I exchange FTSE All-World ex-US for Total International Admiral for the lower ER?
With recent changes to Total International's target index to include both Canada and small cap stocks, Total International looks more attractive to many Bogleheads. If you already hold FTSE All-World Ex-US you might be tempted to exchange it for Total International, but you should look at the costs and benefits of the exchange more closely.

If you are holding FTSE All-World Ex-US in taxable and have significant unrealized capital gains it's probably not worth making the conversion. The difference between an admiral share ER of 0.18% and 0.20% is a mere -$2/year per $10000 invested.

A reasonable alternative is to hold your FTSE All-World Ex-US mutual fund and direct new money to Total International.

What is foreign tax credit?
Foreign tax credit in our context is a refund of tax that Vanguard pays in foreign countries on dividends. When Vanguard distributes dividends, they are already reduced by tax paid in foreign countries. With foreign tax credit, you can get that amount back, but you still have to pay Federal income tax on the dividends before the foreign tax is paid. Sorry, foreign tax credit isn't free money.

I am running out of tax-advantaged room. Should I put Total Stock Market or FTSE All-World ex-US in a taxable account?
In general, you want to put either FTSE All-World ex-US or Total International Index in a taxable account so that you can get a foreign tax credit, but the difference isn't that great, so your individual situation may be different. In particular, if your 401(k) has better international funds than US funds, then you probably want to hold the international funds in your 401(k).

Should I hold FTSE All-World ex-US or Total International Index in a taxable account for a foreign tax credit even though I haven't maxed out my tax-advantaged account?
No, you should fill your tax-advantaged accounts first. The main exception is a 401(k) or 403(b) with expenses so high that they negate the benefit of either tax-deferred growth or tax-free growth; you should only invest enough in such an account to get the maximum employer match. Another exception may be a non-deductible Traditional IRA. It may not be a good idea to place a tax-efficient stock index fund in a non-deductible Traditional IRA. See Non-deductible Traditional IRA for more information.

Wow, FTSE All-World ex-US has expense ratio of 0.35%? Should I buy VEU, the ETF share class of FTSE All-World ex-US, to save on the expenses?
You can gain admiral share status with the fund for an investment of $10,000. If you take the ETF route, you can avoid the two-month redemption fee, but you will likely have to pay a commission on the purchase and sale if you do not purchase them directly from Vanguard. In general, ETF shares may be a good choice if:


 * you already have a brokerage account which has low commissions (no more than $10 or so),
 * you are planning to invest in large lump sum(s), rather than small monthly contributions (which would incur a commission at every purchase),
 * your brokerage allows for (free) reinvestment of fund distributions, and
 * you can resist the temptation to trade the ETFs too often.

For a general discussion of whether to go ETF, see To ETF or Not to ETF.

You may also want to use a calculator at Calculate and compare costs for Vanguard ETFs and mutual funds to see if going with the ETF makes sense for you.

I have Vanguard Tax-Managed International Fund . Is that OK?
It's a great tax-efficient fund except that it does not have emerging markets or Canada.

The combination of Vanguard Tax-Managed International Fund and Vanguard Emerging Markets Stock Index Fund should work just as well as FTSE All-World ex-US or Total International Index. This combination is slightly cheaper and more tax efficient than FTSE All-World ex-US or Total International Index. Assuming a 80%/20% mix in the combo, its weighted average expense ratio is 0.21% with the weighted average QDI ( Qualifying Dividend Income) ratio usually higher due to the 100% qualifying dividends consistently realized by the tax-managed fund.

If you are planning to do tax loss harvesting, Vanguard Tax-Managed International Fund  is not friendly because of its 1% redemption fee for the first five years. You might consider its ETF share class VEA, or convert mutual fund shares to the ETF shares if you need to sell them within the first five years. You can of course consider Total International or FTSE All-World ex-US.

= Advanced questions =

What funds are available if I want to own Europe, Pacific, and emerging markets separately?
Expense ratios as of 2010 semiannual reports.

I heard that slicing and dicing boosts return. Why go broad?
See Slice and Dice International.

The FTSE All-World ex-US lacks small-cap stocks. What should I buy to fill that area?
The Vanguard Total International Index includes the market weighting of international small cap stocks.

Vanguard now has the Vanguard FTSE All-World ex-US Small-Cap Index Fund. If you use this fund, it is more natural to use FTSE All-World ex-US for your large-cap allocation, as the two funds track exactly complementary indexes.

I'd like some value tilt. What options does Vanguard provide?
You might consider Vanguard International Value Fund. If you are interested in growth tilt, consider Vanguard International Growth Fund. Both of these are actively managed funds and thus often distribute capital gains. You should consider placing them in a tax-advantaged account.

I heard enough about tax efficiency, qualified dividends, and all that. Show me some hard numbers!
Barry Barnitz has posted an excellent summary of hard numbers, including qualified dividend percentage and capital gain distributions. Check out Vanguard International Index Fund Tax Attributes.

How are the international funds priced when there is always a market open and trading somewhere in the world?
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern Time. This is true for both domestic and international funds.

Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party.

When reliable market quotations are not readily available, securities are priced at their fair-value (the amount that the owner might reasonably expect to receive upon the sale of a security). A fund will also use fair-value pricing if the value of a security it holds has been materially affected by events occuring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g. earnings report, merger announcement); country-specific (e.g. natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities.

Fair-value prices are determined according to procedures adopted by a fund's board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.