I had a couple of extra minutes on a lazy Saturday afternoon, so I checked my Twitter feed. (NOTE TO SELF: Don't you have anything better to do than browse Twitter on a Saturday afternoon? OK, apparently not.)
Anyway, a tweet caught my eye. It linked an April 26 announcement from Vanguard featuring their latest ETF fee cuts. It went on to note that, with a 50/50 investment in Vanguard Total World Stock ETF (VT) and Vanguard Total World Bond ETF (BNDW), one could effectively own virtually every stock and bond on the planet for 9 basis points!
Well, that was catchy, I thought to myself. It might form the basis for a really neat article! I'd already written about BNDW recently. So, package up a little article with some details on VT, link to the BNDW article, sum it all up . . . ba-zinga!! (my ode to Dr. Sheldon Cooper on the soon-to-be-concluding Big Bang sitcom). Sure enough, it all checked out. Vanguard's fee on VT just cut to .09%, BNDW already at .09%, good to go.
But wait a minute! Always that nagging question, right? With a little effort, I wonder if we could do any better? Turns out, I think we can. Hmm... let's have a look, shall we?
Here's the first question that crossed my mind, due to the sheer audacity of it: Could I actually have the world for 5 basis points?
Now, you might notice that the above question is very slightly different from that posed in the title. We'll get to that later on in the article. First, though let me give you a brief introduction to the 4 ETFs we are going to explore.
ETF #1: Vanguard Total Stock Market ETF (VTI)
VTI was the subject of the very first article I wrote as ETF Monkey for Seeking Alpha, all the way back in June 2015. It then became 1 of 3 ETFs in The ETF Monkey Vanguard Core Portfolio. More than that, it has been an uninterrupted core holding in my personal portfolio since October 17, 2013.
VTI has an inception date of 5/24/2001. According to the Vanguard web page linked below, it has AUM (Assets Under Management) of $109.6 billion. ETFdb.com lists it as the world's 3rd-largest ETF. As a beneficiary of Vanguard's most recent round of fee cuts, its expense ratio is now .03%.
VTI tracks the performance of the CRSP US Total Market Index. Here is a quick snapshot of the fundamentals of the index, as well as the ETF itself.
Source: Vanguard VTI Advisors Page
In a nutshell, Vanguard's advisors page states that VTI "covers approximately 100% of investable companies in the U.S. equity market." In other words, as close to "everything" as one can reasonably hope to achieve. As an extremely broad index, this contributes to the low turnover rate of 3.4% featured in the graphic above.
For any who are interested, in addition to the article linked above, I have covered VTI in greater depth in a more recent comparison of 3 competitive U.S. total-market ETFs.
ETF #2: Vanguard Total International Stock ETF (VXUS)
VXUS has an inception date of 1/26/2011. According to the Vanguard web page linked below, it has AUM (Assets Under Management) of $11.8 billion. ETFdb.com lists it as the world's 59th-largest ETF. As another beneficiary of Vanguard's most recent round of fee cuts, its expense ratio is now .09%.
VXUS tracks the performance of the FTSE Global All Cap ex US Index. Here is a quick snapshot of the fundamentals of the index, as well as the ETF itself.
Source: Vanguard VXUS Advisors Page
Put simply, this is the equivalent of VTI in terms of ownership of international stocks. As opposed to its stablemate Vanguard FTSE All-World ex-US ETF (VEU), which focuses more on large-caps, VXUS encompasses smaller companies as well. Vanguard's advisors page states that VXUS "covers 98% of the world’s non-U.S. markets." You will note that, just like VTI, VXUS sports an extremely low 3.4% turnover rate.
For readers interested in a more in-depth look at VXUS, I recently covered it as my #1 recommendation to fill the allocation to international stocks in my suggested 'perfect portfolio' for the next 10 years.
ETF #3: Vanguard Total Bond Market ETF (BND)
Above, I featured VTI as the subject of my very first article for Seeking Alpha. BND had the honor of being second on that list, and also became part of The ETF Monkey Vanguard Core Portfolio. It has also been a core holding in my personal portfolio since September 3, 2013.
BND has an inception date of 4/3/2007. According to the Vanguard web page linked below, it has AUM (Assets Under Management) of $38.3 billion. ETFdb.com lists it as the world's 19th-largest ETF. As another beneficiary of Vanguard's most recent round of fee cuts, its expense ratio is now .04%.
BND tracks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. Here is a quick snapshot of the fundamentals of the index, as well as the ETF itself.
Source: Vanguard BND Advisors Page
In a nutshell, BND captures a cross section of virtually all investment-grade, taxable, fixed income securities in the United States; including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities. The average maturity is between 5 and 10 years. BND contains 8,463 different bonds, 63.9% of its assets are in U.S. Government bonds, and no bonds rated lower than Baa are included
For readers interested in a more in-depth look at BND, in addition to the article linked above, I have covered BND in greater depth in a more recent comparison of 4 competitive U.S. broad market investment-grade fixed income ETFs.
ETF #4: Vanguard Total International Bond ETF (BNDX)
BNDX is the newest of our 4 ETFs, with an inception date of 5/31/2013. Still, that's a solid track record of over 5 years. According to the Vanguard web page linked below, it has AUM (Assets Under Management) of $16.3 billion. ETFdb.com lists it as the world's 51st-largest ETF. As with the other ETFs in our group, BNDX is another beneficiary of Vanguard's most recent round of fee cuts, its expense ratio is now .09%.
BNDX tracks - and get ready because this is quite a mouthful - the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Here is a quick snapshot of the fundamentals of the index, as well as the ETF itself.
Source: Vanguard BNDX Advisors Page
To minimize the effects of foreign currency exposure, Vanguard employs hedging techniques. Here is the wording as presented in the summary prospectus for BNDX.
The Fund will attempt to hedge its foreign currency exposure, primarily through the use of foreign currency exchange forward contracts, in order to correlate to the returns of the Index, which is U.S. dollar hedged. Such hedging is intended to minimize the currency risk associated with investment in bonds denominated in currencies other than the U.S. dollar.
Put succinctly, Vanguard is attempting to, as closely as possible, give you the actual return from those foreign bonds in U.S. dollars.
For readers interested in a more in-depth look at BNDX, I recently covered it for the first time in this article from August 2018. If you have never considered including international bonds in your portfolio, the article also takes a fairly in-depth look at the question of why you might want to do so.
Putting It All Together - And That 5 Vs. 6 Basis Point Question
First off, I just want to make one simple point. The 4-ETF package I have put together is, in point of fact, a very nice substitution for the VT/BNDW combination.
If you were to look at the Vanguard advisors page for VT, you would quickly note that it has 8,110 holdings as of 3/31/19. What about the VTI/VXUS combination? I've linked the equivalent Vanguard advisors pages for each in connection with the 'fundamentals' graphics displayed above. I'll do the math for you, though. Between the two ETFs, a total of 10,093 holdings. With respect to the international holdings, if you compare the relative weightings of the various countries in VT with VXUS, you will find them roughly the same (bearing in mind that you also have to factor in the overall relative weight of U.S./foreign in VT).
What about my BND/BNDX combination as a substitute for BNDW? That one is really easy. Check this out, from the BNDW promotional brochure.
BNDW streamlines fixed income portfolio construction by investing in a combination of Vanguard Total Bond Market ETF (BND) and Vanguard Total International Bond ETF (BNDX).
Basically, then, we can replicate BNDW by purchasing BND and BNDX in their respective allocations.
With that, back to the original audacious question that started me on this journey. Could I actually have the world for 5 basis points?
In a fashion, yes. Have a look at the graphic below.
Source: Author-Produced Excel Sheet
As can be seen, I take each of the 4 ETFs, propose a weighting, and multiply each to come up with its weighted expense ratio. I then add them together to come up with the overall expense ratio for the total portfolio.
In the above graphic, I demonstrate that one can achieve a stock allocation of 64% domestic and 36% international, combined with a bond allocation of 85% domestic and 15% international, and keep one's overall expense ratio below .05%!
If you look closely at the relative weightings, I don't believe that this is at all a fantastical example. In the comment sections of my earlier articles on international bonds, I encountered a heavy dose of skepticism as to their value. As a result, I am of the view that many investors would be more than happy with this weighting, if not eliminating international bonds altogether.
But now we come full circle to the actual title I selected for the article, in which I posed 6 basis points as the target. You see, that is a fairer comparison. For if I want to put this portfolio up against a VT/BNDW combination, I have to do justice to the overall weightings in that portfolio.
The graphic below does just that. Have a look.
Source: Author-Produced Excel Sheet
As of 3/31/2019, the Vanguard advisors page for VT linked previously in the article reveals a 57.6% weighting in U.S. stocks. Therefore, in the graphic above, you will see that I selected a 28.8% weighting in VTI, with the remaining 21.2% in VXUS.
Moving to bonds, the Vanguard advisors page for BNDW reveals a 41.6% weighting in North America bonds. Therefore, in the graphic above, you will see that I selected a 20.8% weighting in BND, with the remaining 29.2% in BNDX.
And the overall expense ratio? Yep, just a hair over 6 basis points!
Summary And Conclusion
To wrap up this article, I would like to link an excellent article from Forbes on the topic of global asset allocation. It discusses why many shy away from this, due to factors such as home bias, but why such investors may be hurting themselves in the process.
Vanguard has long been a pioneer with respect to "democratizing" the market, bringing the costs of investing down for the average investor. As noted at the outset of this article, using a VT/BNDW combination, one could effectively own virtually every stock and bond on the planet for 9 basis points!
As I have demonstrated in this article, with just a little work, you may be able to do even better.
As always, until next time I wish you...
Disclosure: I am/we are long BND, BNDX, VTI. 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.
Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.