Vanguard Improves Its Total World Stock Market Index Fund (VTWSX) By Slashing Costs And Adding Small Caps

Vanguard recently announced some significant improvements to their Vanguard Total World Stock Market Index Fund (VTWSX) that deserve mention. As you may recall, I wrote a short piece on the fund when it was first released and concluded that while the fund held promise, I wouldn’t be buying it for my own portfolio due to two main reasons, neither of which have changed.

Still, recent improvements at the fund have made it significantly more desirable. I still won’t be buying it for myself, but that doesn’t mean you shouldn’t. In fact, these changes may make the fund near ideal for some investors.

Tracking A New Benchmark

The Total World Stock Market Index Fund originally tracked the FTSE All-World Index but will soon switch to tracking the FTSE Global All Cap Index. What does this mean for investors? More small-caps! The old index contained the largest 2,800 global stocks, covering 90-95% of the investable global equity universe. The new index contains over 8,000 securities across all market caps and contains more than 98% of the investable global equity universe. An additional 3-8% may not sound like much, but it is significant since that additional exposure comes at the bottom of the market cap range.

Eliminating Purchase Fees

While the inclusion of small caps is pretty cool, a far more exciting development is the elimination of purchase fees for this fund. Vanguard has a long history of reducing costs and eliminating fees when a fund grows large enough to stand on its own. Evidently, Vanguard has decided that the 0.25% purchase fee on new shares is no longer necessary, which is obviously a good development for new investors since every reduction in cost results in a corresponding increase in future returns.

The fund still retains its 2% redemption fee, but only for shares sold within 2 months of purchase. For long-term investors, this shouldn’t be an issue.

Should You Buy This Fund?

The question is, do these changes make this fund desirable enough to be worth owning? For many investors, the answer is yes. If you value simplicity, there’s nothing quite so simple as owning every significant stock in the world in one fund. It’s still true this fun is more expensive than holding the components of this fund separately (the total stock market index and the total international stock market index), but that’s the price you pay for convenience. Besides, the expense difference isn’t enough to really be troublesome in the long term, especially since expenses will likely come down in the next few years as fund assets grow.

But I still won’t be buying this fund, for the following reasons.

1. It’s still more expensive than its components – But didn’t I just dismiss this issue by saying “…but that’s the price you pay for convenience?” Yep. And it’s a price well-paid for some investors. But not for me. Since I qualify for admiral shares of the other two funds, I am seeing a substantial expense advantage. If I had less money to invest or didn’t enjoy managing my portfolio as much as I do, I might see things differently. But as it stands, I’ll take the lower cost option. Your mileage may vary, but you shouldn’t feel like what works best for me will necessarily work best for you.
2. Still can’t rebalance – This isn’t so much a downside of the fund as a quirk of my chosen investment style. I’m a slice and dicer and a tilter, meaning I choose not to hold assets in their market weight. Rather, I prefer to remain agnostic about these sorts of things and thus tend to split things 50/50 when it comes to this sort of decision. That is, I don’t know whether domestic or foreign stocks will outperform going forward, so I will just hold them in equal amounts. That way, I win either way. There are a lot of experts who disagree with this approach, however. In fact, most investors are probably better just sticking to market weights without a compelling reason to do otherwise.