Approximating total international stock market

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Approximating total international stock market shows how funds can be combined in order to mimic the composition of the international stock market. Funds can be mutual funds, index funds or exchange-traded funds (ETFs).

Investors wishing 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 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-cap stocks, and Canadian stocks.

Examples

Funds Morningstar
Style Box
100% Vanguard Total International Stock Index (VGTSX) (0.22%)[1]
30 25 24
6 5 5
2 1 1
90% Vanguard FTSE All-World ex-US Index (VFWIX) (0.29%)

10% Vanguard FTSE All-World ex-US Small-Cap Index (VFSVX) (0.37%)

30 26 24
6 5 5
2 1 1
For TSP I Fund Investors or any investor with a MSCI EAFE Index fund:
61.12% Vanguard Developed Markets Index Fund (VDVIX) (0.20%)
17.19% Vanguard Emerging Markets Stock Index (VEIEX) (0.33%)
12.54% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.37%)
6.35% iShares MSCI Canada Index (ETF) (EWC) (0.48%)
2.8% iShares MSCI South Korea Index (ETF) (EWY) (0.62%)
29 24 23
7 6 6
3 2 1
For TSP I Fund Investors or any investor with a MSCI EAFE Index fund and an emerging markets index fund with South Korea[2]:
62% Vanguard Developed Markets Index Fund (VDVIX) (0.20%)
20% iShares MSCI Emerging Markets ETF (EEM) (0.69%)
11% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.37%)
7% iShares MSCI Canada Index (ETF) (EWC) (0.48%)
 
Note: see TSP I Fund investors below for explanations.
30 25 23
7 5 5
2 2 1

TSP I Fund investors

The third 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:

The collection of funds making up the second box is weighted in a manner to approximate the Morningstar Style Box, average market cap, industry and regional weightings of Vanguard Total International Stock Index (VGTSX) (0.22%) [3].

Note: In the computation of the second style box, Schwab Emerging Markets Equity ETF (SCHE) (0.15%) was used in place of Vanguard Emerging Markets Stock Index (VEIEX) (0.33%) during use of Morningstar Instant XRay. Vanguard is still in the process of migrating from the MSCI Emerging Markets Index to the FTSE Emerging Markets Index for their emerging markets funds. [4] Once completed, VEIEX/VEMAX/VWO will be much more representative of the FTSE Emerging Markets Index.

The collection of funds making up the third box is weighted in the following way[5]:

  • 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[6] and 14.8% of Vanguard's FTSE All-World ex-US Small Cap Index Fund[7]. 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's Total International Stock Market Index Fund [8], and are 26% of the Vanguard FTSE All-World ex-US Small-Cap Index Fund[9]. 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:

Region Vanguard Total International
Stock Market Index Fund
I Fund + MSCI Canada
+ MSCI Emerging Markets + Small Cap
I Fund + MSCI Canada
+ FTSE Emerging Markets
+ MSCI South Korea + Small Cap
North America 8.32 8.76 8.37
UK/Western Europe 45.78 44.52 46.60
Japan 14.22 13.73 13.76
Latin America 4.54 4.55 5.09
Asia ex-Japan 24.79 24.19 23.85
Other 2.36 4.24 2.33

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

Sector Vanguard Total International
Stock Market Index Fund
I Fund + MSCI Canada
+ MSCI Emerging Markets + Small Cap
I Fund + MSCI Canada
+ FTSE Emerging Markets
+ MSCI South Korea + Small Cap
Cyclical 46.25 45.96 45.99
Basic Materials 11.04 10.94 10.92
Consumer Cyclical 10.38 10.25 10.36
Financial Services 21.02 21.04 20.95
Real Estate 3.81 3.73 3.77
Defensive 19.97 20.20 20.11
Consumer Defensive 9.72 9.80 9.74
Healthcare 6.92 7.04 6.99
Utilities 3.33 3.36 3.38
Sensitive 33.78 33.84 33.90
Communication Services 5.31 5.13 5.15
Energy 9.19 9.45 9.51
Industrials 12.49 12.63 12.85
Technology 6.78 6.63 6.39

The blended expense ratio for the collection of four funds noted in box 2, assuming that the I Fund takes the place of the developed markets fund it rounds up to 0.18%. Due to rounding error it should be slightly below 0.18% expense ratio for the Admiral share class of Vanguard Total International Stock Market Index Fund. [10] The overall expense ratio may be reduced by using Instutional, Admiral, or ETF share class of respective fund where possible.


The blended expense ratio for the collection of four funds noted in box 3, assuming that the I Fund takes the place of the developed markets fund is 0.25%, slightly more than the 0.18% expense ratio for the Admiral share class of Vanguard Total International Stock Market Index Fund. [11]

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.[12] 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. This may be avoided by owning ETF share classes of Vanguard Emerging Markets Stock Index and Vanguard FTSE All-World ex-US Small Cap Index.

For Canadians, most Registered Retirement Savings Plans have a brokerage function and allow for 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. The investor then could use Vanguard MSCI Canada Index ETF and iShares S&P/TSX Completion Index Fund to balance to their desired domestic exposure.

See also

References