Which Vanguard International Index Fund Is Best?

For the longest time, the Vanguard Total International Stock Index Fund (VGTSX) was pretty much the only game in town when it came to international index investing, at least for retail investors.  Sure, there were a few interlopers like Tax-Managed International Fund (VTMGX), but that was never really a rival of the Total International Fund because a.) it doesn’t include emerging markets and b.) the Total International fund was always tax-efficient enough to negate the need for a tax-managed fund anyway, in my opinion.

Not until the FTSE All-World Ex US Index Fund (VFWIX) entered the picture in early 2007 did the Total International fund have any real competition.  Indeed, there were some heated debates about which international fund was better.  I myself wrote a comparison of the two funds in 2008.  In that post, I wrote that the biggest advantage the FTSE All-World Ex US Index Fund had over the Total International Stock Index Fund was the ability to take advantage of the foreign tax credit.  No longer.

Total International Stock Index Fund Restructures

From inception up until the middle of 2008, the Total International Fund was organized as a fund-of-funds, holding varying allocations to three Vanguard international index funds:  the Vanguard European Stock Index Fund (VEURX), Vanguard Pacific Stock Index Fund (VPACX), and the Vanguard Emerging Markets Index Fund (VEIEX).  Thanks to a quirk of the tax code, since it invested in foreign stocks indirectly through another mutual fund, the Total International Fund was not allowed to take advantage of the foreign tax credit, which is a relatively small but potentially significant tax shelter for many investors with large portfolios.

Since restructuring, the Total International Fund invests directly in the securities of foreign stocks, enabling it to take the foreign tax credit.  Thus, the “which international index fund is best?” debate becomes a bit more complicated.

It’s All Comes Down To Canada

There are really only two differences between the FTSE All-World Ex US Index Fund and the Total International Index Fund:  costs and exposure to Canada’s stock market.  Since the Total International Fund is based on the EAFE, it lacks exposure to Canadian stocks.  Why the EAFE chose to exclude Canada from their developed-markets stock index I’ll never know, but that’s what they’ve done.

The Total International Fund has an expense ratio of 0.32% while the FTSE All-World Ex US Fund clocks in at 0.40%.  Are you willing to pay an extra 0.08% per year in expenses for exposure to the Canadian stock market (Canadian stocks make up about 5% of the fund)?  For me, the answer is absolutely.  Canada is one of the richest and most powerful country on the planet.  To exclude Canada arbitrarily to me seems to be the height of folly.  A 0.08% cost differential amounts to approximately $800 per year on a $1,000,000 portfolio.  Will the additional diversification provided by exposure to Canada make up for the $800 shortfall?  I don’t know.  But come on, it’s only $800.  If you have a $1,000,000 portfolio, $800 isn’t exactly a lot of money.