Vanguard FTSE All-World ex US Index: Factors to Consider

Vanguard introduced earlier this year a new ETF that tracks the FTSE All-World ex US Index (VEU), with an expense ratio of .25%. The FTSE index differs somewhat from the indexes tracked by Vanguard’s Total International Stock Market mutual fund (VGTSX; .32% expenses).

The latter is a combination of the MSCI EAFE and Emerging Markets Index, which excludes Canada. The former includes Canada at a 5% weight.

In both indexes, emerging markets’ weight is 15% to 16%.

We have a mixed view of these very broadly based international index products. On the positive side, for investors with limited funds, they can be a very useful source of portfolio diversification.

However, their relatively small allocations to emerging markets (e.g., a 30% allocation to one of these funds would result in a 5% effective allocation to emerging markets) may be suboptimal for many investors.

For investors who have enough money to invest in a larger number of funds, larger allocations to emerging markets to produce higher returns may make sense, since other asset class products can be used to diversify and reduce some portion of the added risk.

Comments

[pedro]

I completely agree with anonymous, anyone who wants a passive indexing strategy and then begins to overweight sectors such as emerging markets or energy is suddenly becoming an active investor. People need to be aware of this, and ask themselves if they can beat the active money managers. An easy portfolio to set up is allocate 80% to index ETFs such as VTI and VEU, then use 20% to pursue your I think I can beat the market strategy. But don't be surprised when your indexed 80% beats your 20% sector allocation over the long haul.