Approximating total international stock market

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Flag of the United States.svg.png This article contains details specific to United States (US) investors. Acting on fund or ETF suggestions in it may have harmful US tax consequences for non-US investors.

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.

Total international stock market index

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

Total International Stock Market index fund Morningstar
style box
100% Vanguard Total International Stock ETF (VXUS) (0.08%)


Updated 30 May 2021[1]

Value Blend Growth
24 32 21 Large
6 8 5 Mid
1 2 1 Small
100% Fidelity Total International Index Fund (FTIHX) (0.06%)


Updated 16 July 2021[1]

Value Blend Growth
23 34 20 Large
6 8 5 Mid
1 2 1 Small

Approximating total international stock with two funds

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

Match Total International Stock with two funds Morningstar
style box
90% Vanguard FTSE All-World ex-US ETF (VEU) (0.08%)

10% Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) (0.11%)

Updated 30 May 2021[1]

Value Blend Growth
24 32 21 Large
6 8 5 Mid
1 2 1 Small
90% Fidelity ZERO International Index Fund (FZILX) (0.00%)

10% Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) (0.11%)

Updated 16 July 2021[1]

Value Blend Growth
24 33 20 Large
5 9 5 Mid
1 2 1 Small
75% Vanguard FTSE Developed Markets ETF (VEA) (0.05%)

25% Vanguard FTSE Emerging Markets ETF (VWO) (0.10%)

Updated 30 May 2021[1]

Value Blend Growth
24 33 20 Large
6 8 5 Mid
1 2 1 Small
75% SPDR Portfolio Developed World ex-US ETF (SPDW) (0.04%)

25% SPDR Portfolio Emerging Markets ETF (SPEM) (0.11%)

Updated 14 July 2021[1]

Value Blend Growth
24 34 21 Large
6 8 4 Mid
2 2 1 Small
70% iShares Core MSCI International Developed Markets ETF (IDEV) (0.05%)

30% iShares Core MSCI Emerging Markets ETF (IEMG) (0.11%)

Updated 23 June 2021[1]

Value Blend Growth
23 34 20 Large
6 9 5 Mid
1 1 1 Small

Note: Developed and emerging market country classifications vary depending on the index provider.[2] Hence investors are recommended to use both funds from the same provider, as shown in the last 3 examples above.

Approximating total international stock with an EAFE fund

These examples were designed specifically for investors who 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 an EAFE fund can be combined with other funds to match the composition of the total international stock market.

Match Total International Stock using an EAFE fund Morningstar
style box

58% MSCI EAFE Index Fund[3]
27% iShares Core MSCI Emerging Markets ETF (IEMG) (0.11%)
10% Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) (0.11%)
5% iShares MSCI Canada ETF (EWC) (0.51%)

Updated 30 May 2021[1]

Value Blend Growth
24 34 21 Large
5 8 4 Mid
2 2 1 Small

58% MSCI EAFE Index Fund[3]
23% Vanguard FTSE Emerging Markets ETF (VWO) (0.10%)
10% Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) (0.11%)
5% iShares MSCI Canada ETF (EWC) (0.51%)
4% iShares MSCI South Korea ETF (EWY) (0.59%)

Updated 30 May 2021[1]

Value Blend Growth
24 34 21 Large
5 8 4 Mid
2 2 1 Small

The MSCI EAFE index does not include:

Investors may wish to use one of the two boxes depending on whether they have access to an MSCI or FTSE emerging markets index fund. Note that MSCI classifies South Korea as an emerging market, while FTSE considers it a developed market[4]; 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. The expense ratios can be reduced 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.

Note that 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 needed 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.[note 1] This may be avoided 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 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.

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%).[1]

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[5] and 14.8% of Vanguard's FTSE All-World ex-US Small Cap ETF.[6] 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,[note 2] and are 28.3% of the Vanguard FTSE All-World ex-US Small-Cap ETF.[note 3] 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%):

Region Vanguard Total International
Stock ETF
I Fund + MSCI Canada
+ FTSE Emerging Markets
+ MSCI South Korea + Small Cap
I Fund + MSCI Canada
+ MSCI Emerging Markets + Small Cap
North America 07 07 07
Latin America 02 02 02
United Kingdom 09 09 09
Europe Developed 29 31 31
Europe Emerging 01 01 01
Africa/Middle East 03 03 03
Japan 16 15 15
Australasia 05 05 05
Asia Developed 12 12 12
Asia Emerging 16 15 15
Not Classified 00 00 00

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

Sector Vanguard Total International
Stock ETF
I Fund + MSCI Canada
+ FTSE Emerging Markets
+ MSCI South Korea + Small Cap
I Fund + MSCI Canada
+ MSCI Emerging Markets + Small Cap
Cyclical 42 42 42
Basic Materials 08 09 09
Consumer Cyclical 12 12 12
Financial Services 18 18 18
Real Estate 04 04 04
Sensitive 38 37 37
Communication Services 07 07 07
Energy 04 04 04
Industrials 13 13 13
Technology 13 13 13
Defensive 20 21 21
Consumer Defensive 08 08 08
Healthcare 09 09 09
Utilities 03 03 03

These percentages were last updated on May 30, 2021.

Notes

  1. For an older version of the weightings and price calculation, see the Vanguard Total International Stock Market replication with I Fund Google Spreadsheet.
  2. 29.6% = 25.5% FTSE emerging markets + 4.1% South Korea.[5]
  3. 28.3% = 23.4% FTSE emerging markets + 4.9% South Korea.[6]

See also

References

  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Morningstar X-Ray, (free) subscription required to access.
  2. "Is South Korea crowding your emerging markets allocation?". S&P Global. November 24, 2020.
  3. 3.0 3.1 Approximated with Schwab International Index Fund (SWISX) (0.06%), May 30, 2021.
  4. FTSE Russell (February 19, 2014). "South Korea: Developed or Emerging?".
  5. 5.0 5.1 Vanguard (April 30, 2021). "Vanguard Total International Stock ETF (VXUS) Portfolio & Management".
  6. 6.0 6.1 Vanguard (April 30, 2021). "Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) Portfolio & Management".

External links