More Changes At Vanguard Total International Stock Index Fund Make The FTSE Fund Redundant
One thing I’ve learned over the past few years is that the mutual fund industry changes incredibly quickly. Not too terribly long ago, Vanguard switched their Total International Stock Market Fund (VGTSX) from a fund-of-funds approach to directly invest in the underlying securities, a move which brought moderate tax benefits.
While both the Total International Index Fund and the FTSE All-World Ex USA Index Fund have been decidedly above-average, I tended to prefer the FTSE fund for reasons I’ve previously written about. Well, in an unexpected (to me, at least) move, Vanguard has put the final nail in the FTSE vs Total International fund debate by announcing that the Total International Fund will be switching indexes to the MSCI All World ex US Investable Market Index. In case you aren’t aware, the new MSCI index and the FTSE index are both pretty much the same.
And The Winner Is…Total International Index Fund
Not a single one of my reasons for preferring the FTSE fund will remain valid after the switch:
- Canadian Exposure? The new fund has it.
- Foreign Tax Credit? Yep, the Total International Index Fund does indeed qualify for the foreign tax credit.
But Wait, There’s More!
Now Canada is awesome (especially British Columbia), but that might not be enough to entice most investors to switch. But there is one huge reason to prefer the new Total International Fund over the FTSE fund: small caps. You see, the new total international fund will invest approximately 13% of its assets in small-cap stocks, according to Morningstar. By contrast, the FTSE fund currently doesn’t own any small-caps at all and only a token amount of mid-caps. Finally, investors can gain access to the diversification benefits of small-cap foreign stocks without the hassle and tax-inefficiency of owning a dedicated small-cap international fund. This is a significant advantage for me, and I will be switching to the Total International fund in my Roth IRA once the change is made.
Did I Mention It’s Cheaper, Too?
Yep, the Total International fund currently charges just 0.27% per year versus the FTSE’s 0.40%, a significant savings in the index fund world.
So what does the future hold for these two funds? Well, in light of the cost advantage of the total international fund, I honestly can’t recommend that anybody consider owning the FTSE fund anymore. My guess is that they will eventually be merged, creating one super-fund. That way, shareholders of both funds will be able to enjoy increased economies-of-scale and hopefully even lower expenses.
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“… the Total International fund currently charges just 0.27% per year versus the FTSE’s 0.40%…”
No. According to the Vanguard website, the current expense ratio for VGTSX is 0.32%, not 0.27%.
A lot of us love the low cost of the Vanguard index funds but their ETFs are even cheaper. While VFWIX expense ratio is 0.4%, the ETF equivalent (VEU) is only 0.25%.
Even better, there are currently 21 Vanguard index funds that allow you to convert mutual fund shares into ETF shares at NAV. For free. And if you do this in a taxable account, it is considered a nontaxable event.
For the buy and hold types, it would be cheaper to transfer the bulk of their money into ETFs while maintaining their index mutual funds for the purpose of making future, regular purchases. Once you have a certain amount over the minimum allowed by the fund, transfer it into an ETF and enjoy the savings.
You have to wait until the end of the fiscal year to know what the ER really turns out to be, but Vanguard has announced it will likely be 0.27%. When the assets of the fund dipped during the crash, the ER went up (same costs, lower asset base).
What’s amazing with Vanguard’s Total International Stock Index Fund is that:
1) The ER is 0.26% for Invstor Shares.
https://personal.vanguard.com/us/funds/snapshot?FundId=0113&FundIntExt=INT
2) There is a new class of Admiral Shares with an ER 0f 0.20%
https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT
3) The Admiral Shares ER = ETF Shares ER
4) The minimum requirement to qualify for Admiral shares have reduced to $10,000
“the new total international fund will invest approximately 13% of its assets in small-cap stocks…”
My current reading of Morningstar says only 4% in small cap stocks. Why???
Thank you.
Different people define “small cap” in different ways
How do you define small cap?
However Vanguard defines it.
Boglehead has a forum, in which someone discussed how the FTSE all-world ex-us index fund has consistently beaten the Total International Index, possible because the former includes a bit more of emerging market. Just a thought. I’m keeping FTSE for my IRA.