When To Use Vanguard FTSE All-World Ex USA Index Fund Versus Vanguard Total International Index Fund

Vanguard, my favorite mutual fund company, now has two foreign index funds (as opposed to the global index fund). Since these two funds mostly overlap, it may seem a bit redundant to offer two of them, but each fund has its own particular characteristics that makes is better-suited for certain situations than the other. I actually own both: Total International Index Fund in my Roth IRA and FTSE All-World Ex USA in my taxable account.

FTSE All-World Ex USA Index Fund

Vanguard’s FTSE All-World Ex USA Index Fund (VFWIX) was introduced in March of 2007, likely as a platform to allow Vanguard to release a broad-based foreign ETF (this wasn’t possible with the Total Intl Index). Its main advantages over the Total International Fund lies in its ability to take advantage of the foreign tax credit and its 5% stake in Canadian stocks, which are absent from the Total International Fund and most other foreign mutual funds.

As one of the world’s richest countries, Canada definitely deserves a place in your portfolio. Coincidentally, the Canadian economy is heavily invested in natural resources such as oil, copper, and the like which should prove a stabilizing force in your portfolio in times of high inflation.

The FTSE All-World Ex USA Fund’s ability to take advantage of the foreign tax credit is probably its greatest advantage over the Total International Fund. Since it owns foreign securites directly (unlike TISM, which is a fund-of-funds), it can claim a tax credit for taxes paid to foreign governments, making it more tax-efficient than its fund-of-funds counterpart. Because of its tax advantages and the benefit of being slightly more diversified, the FTSE All-World Ex USA Index Fund is generally preferable in taxable accounts.

Total International Stock Index Fund

Vanguard’s Total International Stock Index Fund (VGTSX) has one advantage and one advantage alone over its competition: lower expenses. Its 0.27% expense ratio is significantly cheaper than the FTSE fund’s 0.40%. Furthermore, there are no purchase or redemption fees, unlike the FTSE fund. It is true that the FTSE fund’s expense ratio is bound to go down over time as it gathers more assets and at that point will probably represent a better buy, but until then I recommend owning Total International Stock Index in your tax-advantaged accounts to take advantage of its lower expenses. When the time comes where the FTSE fund is as cheap as the Total International Fund, you can always switch with no tax consequences. The foreign tax credit is obviously useless in an IRA and in my opinion, the absense of Canadian stocks isn’t quite enough to make it worth paying an extra 13 basis points in expenses.