Earlier this month, Vanguard filed with the SEC to offer the Vanguard Global Stock Index Fund. It will track the FTSE All-World Index, a market-cap-weighted index of large and mid-cap stocks all over the world. It will be offered in both Investor and ETF share classes with expense ratios of 0.45% and 0.25%, respectively.
With approximately 55% of its assets allocated overseas and the rest in the US, the Vanguard Global Stock Index Fund will be the most broadly-diversified index fund in Vanguard’s lineup. It will also be one of the most tax-efficient since there are few conceivable reasons the fund would ever need to sell appreciated stocks, keeping capital-gains distributions to a minimum. It’s a great fund, but I won’t be buying it.
The Whole World In One Fund
At first glance, owning the entire world may seem ideal, and in many ways it is. You never have to worry about whether or not you’re under-weighting foreign stocks, rebalancing, missing the next hot growth economy, or even the value of the dollar. So why am I not buying it? Two reasons:
- It’s (Relatively Speaking) Expensive - Yes, I know an expense ratio of 0.45% is well below average, especially in the world stock category, but I can create my own even cheaper. Using Vanguard’s Total Stock Market Index Fund (VTSMX) and FTSE All-World Ex USA Index Fund (VFWIX) in the same proportion as the global fund, I can create the same fund for an aggregate expense ratio of just 0.2875%. On a $1,000,000 portfolio (a man can dream, right?) you’d pay an extra $1625 per year for the privilege of not having to spend two minutes per year rebalancing your portfolio. Doesn’t seem worth it to me.
- You Can’t Rebalance - One of the fund’s greatest strengths is also one of its greatest weaknesses. Since the global stock market fund is market-cap weighted, the country and region allocations will float on the whim of investors, precluding the ability to buy low and sell high by rebalancing. One of the fundamental tenants of modern portfolio theory is that regular rebalancing yields a rebalancing bonus, which is as close to a free lunch in investing as you can get. Sure, you give up a little tax-efficiency by owning two funds rather than just one, but I believe those tax costs can be minimized in most reasonably-sized taxable portfolios by a thoughtful rebalancing strategy. The value of the rebalancing bonus is likely to be greater than the additional tax cost involved and besides, tax considerations are moot for those of you investing in an IRA.
I will continue owning equal portions of the Total Stock Market Index Fund and the FTSE All-World Ex USA Index Fund in my taxable account for the foreseeable future. The Global Index Fund is an excellent fund, just not for my needs.
4 responses so far ↓
1 Carnival of Personal Finance #150 // Apr 28, 2008 at 5:58 am
[...] Asset Allocator won’t be investing in the Vanguard Global Stock Index Fund. I’m Lazy so this fund seems like a good one-stop shop for most people. However, like AAA, I [...]
2 AndyS // Apr 28, 2008 at 9:35 am
Great logic and I like the idea of using the blended fund approach to mimic the existing fund.
3 Weekend Link Love And Carnival Roundup - 5.3.08 | Amateur Asset Allocator // May 3, 2008 at 2:17 pm
[...] post on Vanguard’s Global Stock Market Index Fund was included in this week’s Carnival of Personal Finance #150 hosted by Lazy Man And [...]
4 Joseph Mark Jarvis // May 13, 2008 at 1:17 pm
Re: Expense ratios
The ETF share class’s expense ratio is 0.25%, which is less than your portfolio’s aggregate expense ratio of 0.2875%. And it’s not unreasonable for one to assume that Vanguard will lower the mutual fund share class’s expense ratios as the fund gets larger. Vanguard will convert shares’ class for modest fees. Even with a higher expense ratio, one has to weigh the additional explicit cost against the less monetized benefits of having one fewer fund. For example, if one were investing outside tax sheltered accounts, where capital gains make transactions undesirable and investors ought track cost basis on all purchases, one fund would make things a lot simpler.
Re: Rebalancing
Your criticism that “the country and region allocations will float on the whim of investors” is the advantage an efficient markets proponent would praise. How can one consistently hold the belief that markets are efficient in allocating capital between market caps or sectors but not geographic regions or currencies? Global Stock Index is only an extension of the same investing philosophy behind TSM and All World ex-USA, neither of which rebalances between their constituents (e.g., market cap, sector). All World ex-USA doesn’t allow you to rebalance between region or country. In essence you’re defending indexing but simultaneously claiming one can market time domestic vs. aggregate foreign.
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