Creation Date: 05/06/2008
Contents
Introduction
The Vanguard FTSE All-World ex-US Index Fund is the company's most widely diversified international stock fund, presently tracking the FTSE All-World ex US Index. According to the fund's prospectus, this index:
"...employs a "passive management" --or indexing--investment approach designed to track the performance of the FTSE/(R)/ All-World ex US Index, a free-float- adjusted, market-capitalization-weighted index designed to measure equity market performance of international markets. The Index includes approximately 2,200 stocks of companies located in 46 countries, including both developed and emerging markets. As of October 31, 2007, the United Kingdom, Japan, France, Germany, Australia, and Switzerland made up approximately 17%, 14%, 8%, 7%, 5%, and 5%, respectively, of the Index's market capitalization. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index."
The Fund Holdings page on the Vanguard website reports that as of 03/31/2008, the fund invests in 2217 stocks, while the benchmark index includes 2236.
Share Classes
Two share classes are available to individual investors:
- Investor (VFWIX), with an expense ratio (ER) of 0.40%, an initial minimum investment of $3,000, and a 0.25% purchase fee, along with a 2% redemption fee on shares sold within two months of purchase
- ETF (VEU) with an ER of 0.25% and no minimums, though transaction costs apply in buying and selling through a brokerage
Total costs of the ETF and open-end classes may be compared via this Vanguard calculator, although the differential in Vanguard's charges will likely steer most investors toward VEU.
An additional share class is offered through some workplace retirement plans:
- Institutional (VFWSX) with an ER of 0.15%
Advantages
Broad Coverage
The FTSE All-World ex-US Index Fund holds equities from all foreign developed markets and most emerging markets. The fund is unique among Vanguard's indexed offerings in its inclusion of Canadian stocks.
Tax Efficiency
The FTSE All-World ex-US Index Fund is quite tax-efficient, making it a suitable holding for a taxable account. Because the fund holds a capitalization-weighted portfolio from essentially all foreign markets, successful stocks almost never leave its benchmark index, so the fund doesn't generally realize capital gains by selling securities. The existence of an ETF share class is also helpful in this regard, since when institutional investors redeem creation units for their constituent stocks, Vanguard uses the opportunity to dispose of low-basis lots. About the only scenario under which the fund could realize large capital gains is massive shareholder redemptions, unlikely in the absence of an unprecedented market crash (which would in itself solve the capital gains problem).
The fund's dividend yield, being in line with the world ex-US markets', is not unusually high. Further, most of the fund's income should be in the form of qualified dividends, currently taxable at a 15% rate or less. The fund's dividends were 87.23% qualified in 2007. This figure slightly surpasses the 74.31% number achieved by the Total International Stock Index Fund, the subject fund's main competitor within Vanguard.
The foreign tax credit is a consideration which clearly favors FTSE All-World ex-US Index over Total International Stock Index for taxable investors. The former offering invests directly in stocks, so it is eligible for the credit. The latter is a fund-of-funds, which makes it ineligible.
Criticisms
Size and Style
Academic research indicates that small and small value stocks have provided significant diversification effects compared to other international equity categories in the past. The FTSE index is limited to large and mid cap international stocks, and provides no asset class exposure to small cap international stocks. Applying Morningstar Instant X-Ray to VFWIX shows 90% large cap, 10% mid cap and 0% small cap allocations, though such numbers are heavily dependent upon an information provider's exact size and style definitions.
Bubble Risk
If a group of stocks becomes irrationally popular, their market capitalizations increase, so they are more heavily emphasized in any market-weighted fund. This effect, which depends upon the belief that stock sectors or even whole nations' markets can become significantly mispriced, may lead to sharp fund declines when the bubble bursts, i.e., the overvaluation unwinds itself. An obvious example, with benefit of hindsight, is the global technology boom of the late 1990s followed by the 2000-2002 bust.
Relatively High Costs
Expense Ratios
The current 0.40% expense ratio of VFWIX is high by Vanguard standards. For example, the following open-end fund holdings approximate VFWIX roughly with lower expense ratios:
- 100% Total International Stock Index Fund: Expense ratio = 0.27%
- 80% Tax-Managed International Fund plus 20% Emerging Markets Stock Index Fund Investor Shares: Expense ratio = 0.19%
VEU's current 0.25% expense ratio is also comparatively high. Using Vanguard's own exchange traded products, an investor may obtain a rough VEU proxy through 80% Europe Pacific ETF and 20% Emerging Markets ETF, with an effective expense ratio of 0.15%.
Given the newness of the FTSE All-World ex-US Index Fund, it is likely that its asset base will grow substantially over the years, lowering its expenses.
Purchase Fee
The 0.25% purchase fee applicable to VFWIX and VFWSX is fairly unusual. Among Vanguard's other present offerings, only the open-end share classes of Emerging Markets Stock Index Fund have purchase fees. This type of charge, intended to defray a fund's costs in buying and selling securities, is paid to the fund itself (not Vanguard), benefiting all shareholders. The existence of the fee actually helps sufficiently long-term investors, since they receive tiny slivers of the fees paid over time by other purchasers. Nevertheless, some investors perceive the distinction between purchase fees and sales loads to be minor. Keep in mind, that as asset levels in the fund rise and transaction costs as a percentage of net assets fall, Vanguard is likely, as it has done in past, to reduce or eliminate the transaction fee.
Performance
This historical returns webpage provides VFWIX performance.
History
Inception dates of the various share classes are as follows:
- ETF: 03/02/2007
- Investor: 03/08/2007
- Institutional: 04/30/2007
Links
FAQ on Vanguard International Funds (Local wiki page)
Vanguard International Index Fund Tax Attributes-FY 2007 (monograph by Barry Barnitz) contains tax data on the fund
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