An International ETF That Has It All (And It's Cheap)


Investors have widely favored international exchange traded funds over U.S.-focused equivalents this year. Eight of the top 10 asset-gathering ETFs on a year-to-date basis are international ETFs while just one of the 10 worst ETFs in terms of outflows is an international fund.

The preference has been for developed markets funds even with emerging markets equities trading at compelling discounts. For investors looking for exposure to both developed and emerging markets under the umbrella of a single fund, there is the Vanguard Total International Stock Index Fund ETF (NYSE:VXUS).

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VXUS is up almost 1.6 percent year-to-date, a performance that lags the S&P 500 and other major developed market benchmarks, but one that is also sturdy when considering the weakness in emerging markets stocks. VXUS features nearly 40 countries in its portfolio with weights ranging from 0.1 percent for four nations to 17.6 percent for Japan.

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VXUS is dominated by blue-chip multinationals, which during the past few years have benefited from improving productivity, cheap financing, and exposure to faster-growing emerging markets. Most of these firms are in good financial shape. However, now that the U.S. Federal Reserve's quantitative-easing program has ended, there is uncertainty as to how monetary policy will be managed and how it might ultimately affect global asset prices--especially considering that valuations across most major asset classes appear to be somewhat stretched, according to a Morningstar research note.

Other Advantages

VXUS has some other advantages. With its wide-ranging country exposure, VXUS holds nearly 5,900 stocks across all cap spectrums. That is the deep bench strategy that is the hallmark of so many Vanguard ETFs and one that ensures the firm's broad market ETFs offer investors all-encompassing or close to all-encompassing exposure to a region or regions. Even when adding up a popular, diversified developed markets ETF with an equivalent emerging markets fund, investors would find it difficult to get exposure to nearly 5,900 stocks.

Nearly 18 percent of VXUS's weight is allocated to emerging markets equities. The ETF tracks an index from FTSE Russell, which classifies South Korea as a developed market. Asia's fourth-largest economy is 2.9 percent of VXUS.

Another VXUS perk, and it is one Vanguard investors are familiar with, is a low expense ratio. VXUS charges just 0.14 percent per year, or $14 per $10,000 invested.

Europe looms large in VXUS with developed and emerging European countries combining for over 47 percent of the ETF's weight.

At this time, the European Central Bank is doing whatever it can to preserve the European Union and prevent the eurozone from going into a deflationary spiral. During the past few years, European equities, as measured by the MSCI Europe Index, have recovered from 2012 lows. However, this rally was muted for investors in this fund because of the falling euro against the U.S. dollar. The MSCI Europe Index, in U.S. dollars, returned 7.6% in the two-year period through July 2015; in local currencies, the index returned 13.2%, said Morningstar.

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