VXUS: A Decent Cornerstone For A Globally Diversified Portfolio
Summary
- The Vanguard Total International Stock ETF is a well-rounded international equity ETF with a very low expense ratio of 0.11%.
- The fund's 6000+ holdings span 49 countries.
- A distinct tilt away from tech stocks and towards energy and financial services give this index ETF a yield advantage over many of its competitors.
- However, other funds exist with similar portfolio allocations and lower fund expenses.
Investors who are expecting to earn 10% annual returns on their investment portfolios, especially the US-focused portion of their portfolio, might be in for a rude awakening over the next few decades. According to a recent analysis by Charles Schwab, elevated equity market valuations and low rates of economic growth are expected to depress returns across all asset classes over the next decade. The asset class most affected: US Stocks, especially large-capitalization companies.
Source: Charles Schwab
One asset class which fares relatively well under Schwab's scenario? International stocks. As US equities chugged ever-higher in the wake of the Great Recession, international stocks stumbled starting in around 2012, as the chart below illustrates.
The Vanguard Total International Stock ETF (NASDAQ:VXUS) is one such vehicle for gaining exposure to international markets. While the fund itself is less than a decade old, Vanguard has been central to the evolution of the retail asset management business since the 1980's. In particular, Vanguard has become known for its low fund expenses. This reputation is well earned, as VXUS charges only a 0.11% management fee. This low fee has, in turn, helped VXUS to attract over $11 billion in assets under management, making fund closure risk virtually nonexistent.
Portfolio Allocation
As with most broad-market international index funds, VXUS's portfolio holdings skew towards developed-market Europe as well as Japan. However, its 21% allocation to emerging markets ensures that investors in the fund have ample exposure to the high long-term growth that is expected to occur in these markets over the next few decades. Top emerging market holdings include Tencent, Alibaba, and China Construction Bank Corporation.
Source: Fund Website
Where VXUS gets more interesting is in terms of its sector allocations. While a large portion of index funds tend to assign technology stocks a relatively high weighting in their portfolio, VXUS tilts somewhat away from technology stocks, in favor of other sectors, including financials, energy, and telecommunications. If you are skeptical about the ability of technology stocks to hold their currently elevated valuations over the long - term, this is a good thing.
Another effect of VXUS's underweighting of the technology sector is a slightly higher distribution yield that is available to investors. While VXUS's distributions fluctuate from year to year, the trailing twelve-month distribution yield of the fund is higher than two of its competitors, the iShares Core MSCI Total International Stock ETF (IXUS) and the Schwab International Equity ETF (SCHF). While the difference is only 30 basis points, investors who are looking for a long-term portfolio anchor should not underestimate the power of compounding an extra 30 basis points of yield over 20, 30, or even 40 years.
Risks & Possible Alternatives
With trade-related tensions flaring between the United States and China, investors getting into international equities of any stripe face the possibility of losses in the short term. However, over the long term, the global economy will adapt to whatever outcome acts to resolve the current trade dispute. In fact, if US-China tensions result in more business being down between, say, China and the European Union due to US tariffs, international equity funds might actually benefit as their constituent companies book more revenue.
Investors looking for an ETF upon which to base their international portfolio should also look around to see which funds offer the best deal in terms of management fees. Amazingly, the Schwab International Equity ETF (SCHF) charges a nanoscopic expense ratio of only 0.06! This is about half what VXUS charges. It is also worth noting that SCHF underweights technology to an even greater extent than VXUS, in favor of conservative, dividend-paying sectors such as financials and consumer products companies. However, this sector allocation does not translate into the same level of yield as VXUS. This state of affairs means that the choice between VXUS and SCHF ultimately comes down to whether the prospective investor in these funds prefers to pay the lowest management fees possible --advantage SCHF -- or to enjoy a higher yield --in which case VXUS pulls ahead.
Closing Thoughts
The Vanguard Total International Stock ETF is a good choice as the mainstay of an internationally diversified investment portfolio. Its legendarily investor-friendly sponsor, massive AUM, low expense ratio, and relatively high distribution yield all help to commend it to further consideration. At the same time, investors who are searching for rock-bottom fees and who agree with VXUS's allocation towards higher-yielding sectors such as financials and industrials at the expense of technology stocks might want to consider Schwab's competitor offering, SCHF.
Disclaimer: Use my work as a starting point for your own due diligence, not as a substitute. All investments involve the risk of loss of income as well as the principal. Consider consulting with an investment adviser before making any investment. I am not a tax professional or investment adviser. Please consider consulting with a tax professional before making any investment. Author-generated charts are subject to error due to discrepancies in source data or securities being listed on multiple international markets.
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This article was written by
Analyst’s Disclosure: I am/we are long VXUS, IXUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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