A Guide to Investing in International Index Funds

Most readers know that I added an international index fund to our personal investment portfolio. 

Ever since then, I’ve been meaning to write this post.  Because let me tell you, there’s no shortage of options to choose from! 

Too much choice often leads to overwhelm, which is really unhelpful when it comes to investing.  So today, we’ll browse the menu and take a look at some of the most common options for investing overseas.

From there, we’ll look under the hood and see what’s inside.  Which funds make sense?  What are the pros and cons of each?  And how should we decide what to invest in?  Lots to discuss, so let’s dive in.

(Friendly disclaimer:  These comparisons are for informational purposes only.  Please do your own research when making financial decisions.)

 

What are we trying to achieve?

The first step is to get clear about why we’re investing overseas.  People will have different motivations and goals when it comes to choosing an international index fund to invest in.

Are we investing overseas for some extra diversification?  Do we want exposure to every global market, or just one country in particular?  Are we happy to have multiple funds or do we want just one?  Do we want the absolute lowest fees, or do we want the fund we think will perform best?

As you can see, there are many factors at play.  I’ll offer my thoughts on different options and explain why I chose the fund that I did.  (beware, the official fund names are a mouthful!) 😉

 

Developed Markets

Developed markets make up most of the world’s equity markets (around 85-90%), with emerging markets making up the other 10-15%.  In a minute you’ll see exactly which countries this includes.

So let’s focus on the most common index funds for investing in developed markets.  The following two options give you an overwhelming amount of global diversification with just one fund.

 

Vanguard International Shares Index ETF (VGS)

What does VGS invest in?  Vanguard’s VGS is an index fund which seeks to track the return of the MSCI world index, excluding Australia.  

In plain English, VGS invests in over 1,500 medium and large companies from developed countries all over the world.  Here’s VGS broken down by country…

Quite a heavy allocation to the US.  That’s because the US has so many giant listed companies, much more so than other countries. 

And in case you’re interested, here is the breakdown of the top 10 holdings and sectors…

What’s not included?  VGS does not include small companies.  Nor does it invest in any emerging markets.  Medium and large companies from developed markets only.

Management expense ratio (MER):  VGS has a management fee of 0.18% per annum.  That’s pretty cheap for how many companies it gives you exposure to.

Pros:  VGS is a widely diversified index fund.  Being domiciled in Australia, it’s simple and transparent.  Because of this, there are no confusing tax issues (more on this below).  By that I mean Vanguard goes out and buys shares of the underlying companies for you.  Other index providers do it differently (more on this soon). 

Cons:  Other international index funds are cheaper.  And if you want emerging markets or small companies, you’ll have to invest in other funds for that.

 

iShares World All-Cap ETF (IWLD)

What does IWLD invest in?  IWLD is an international index fund like VGS.  It invests across developed markets around the world, with a few key differences.

IWLD also includes small global companies as well as Australia (at around 2% of the fund).  So in this sense, it is a total market fund covering all developed countries.  As you can see below, IWLD has roughly the same spread of countries as VGS…

What’s not included?   IWLD does not include emerging markets.

Management expense ratio (MER):  IWLD has a very low management fee of 0.09% per annum.  Half the price of VGS.  But there’s a catch:  IWLD does not go out and buy the shares for you to replicate the index. 

Instead, it buys its US domiciled funds to create the same thing (using a handful of ETFs).  This keeps cost down, but creates some tax issues.  Multiple funds also seem to create more turnover when the fund is rebalanced.

Pros:  The management fee is very low.  Small companies are included.  Also, the fund is domiciled in Australia so there are no estate tax issues which can be the case when owning US domiciled funds (more on this here).

Cons:  Because the fund is not as large as VGS ($125 million versus $2.2 billion), the spread when you buy and sell is also quite large (the difference between the market price and the price you can buy).  So although the management fee is half the cost of VGS, you’re losing that benefit to other inefficiencies.  (see more detail in a comparison between VGS and IWLD here)

 

US Market

Because the US has the majority of the world’s major companies, some see the US as the only worthwhile place to invest outside Australia.  For that reason, many folks go for a simple US-only index fund like the following three options.

 

Vanguard Total US Stock Market ETF (VTS)

What does VTS invest in?  VTS is a fund which tracks the total US stock market.  There are around 3,500 US companies of all sizes in VTS at the time of writing.  I won’t bore you with the names of big American companies as you already know them!

What’s not included:  The fund is US-only, so it holds nothing listed in other markets.

Management expense ratio (MER):  The management fee of VTS is mind-blowingly cheap at 0.03% per annum.

Pros:  You get exposure to the entire US market, with small caps included at an incredibly low fee.

Cons:  This fund is domiciled in the US, which means there are potential tax consequences down the line in terms of estate tax as mentioned earlier.  And a form you’ll have to fill out every three years. 

 

iShares S&P 500 ETF (IVV)

What does IVV invest in?  As you might guess, this index fund invests in S&P 500 – the largest 500 stocks in the US.

What’s not included:  IVV does not include small companies as it is only the top 500.  Nor does it include anything outside the US.

Management expense ratio (MER):  The management fee of IVV is very low at just 0.04% per annum.

Pros:  IVV is ultra cheap and holds the biggest blue chip American companies, many of which are global.  It’s also domiciled in Australia so there are no tricky tax laws or forms to worry about.

Cons:  Smaller companies are ignored.  And some would say this excludes too much of the world’s other equity markets.

 

BetaShares NASDAQ 100 ETF (NDQ)

What does NDQ invest in?  This ETF invests in the biggest 100 non-financial companies listed on the NASDAQ stock exchange.  Therefore, the number of companies in NDQ is much smaller than the above options.  This makes it much less diversified.  Take a look…

Holy cow!  Half the fund is in tech stocks, with 25% in just two companies!  This concentration has been the winning hand in recent times, but it’s unlikely to stay that way forever.  It makes the Aussie market look like the epitome of diversification!  😉

What’s not included:  NDQ doesn’t really include medium or small sized companies.  And obviously, nothing outside the US.

Management expense ratio (MER):  The management fee for NDQ is much higher than the other options listed here, at 0.48% per annum.  Fans would suggest the higher fee is worth it.

Pros:  If you think tech is going to eat the world and these companies are going to keep growing, then maybe NDQ is what you want.  But history would tell us to be cautious of that assumption – quite often, today’s darlings end up being tomorrow’s disappointments, especially when they’re trading at expensive valuations.

Cons:  Relatively high fees.  Plus, NDQ is a very concentrated bet.  If large tech companies run into trouble, or fall out of favour, this fund will be hit hard.  

 

Emerging markets

Outside developed countries like the US, UK, Japan, Australia and so on, there are lots of less mature markets to invest in.  Emerging countries account for a big chunk of the world’s economy, but only a small slice of global markets (see below).

“Ins and Outs of Emerging Market Investing,” by Dimensional

Therefore, some say we should invest in these up-and-coming countries as they’ll grow to become bigger pieces of the pie over time.  But that may or may not occur.  Don’t assume that high growth economies lead to high returning stockmarkets.  That’s actually not the case (see here and here).

Emerging countries have less stringent reporting standards, rule of law and transparency than we do.  There’s likely to be less scrutiny over the way shareholder’s capital is managed.  And finally, corruption can be more common and governments are less predictable, making the investing environment more costly and less certain.

 

Vanguard Emerging Markets Shares ETF (VGE)

What does VGE invest in?  VGE invests in an index of around 5,000 companies listed in over a dozen emerging markets.  The fund is heavily weighted to China, followed by Taiwan, India and Brazil.

What’s not included:  Developed markets are not included.

Management expense ratio (MER):  The fee for VGE is currently 0.48% per annum.  Much higher than broad international index funds like developed markets.  But this should reduce as the fund gets bigger.

Pros:  Access to companies from all over the emerging markets, many of which are dominant in their local countries.  China has impressive tech giants of their own, just like the US.  Maybe they compete and one day overtake the US giants, who knows?

Cons:  Less stringent rules and investor protections than we have in Western countries.  Fees are higher.  And emerging markets can be less stable, politically and economically, with their markets being more volatile.  Some see the volatility as a positive, whereas other investors won’t. 

 

Vanguard Asia ex-Japan Shares Index ETF (VAE)

What does VAE invest in?  VAE is an Asia-only index fund, which excludes Japan.  So you could think of it like ’emerging Asia’.  Like VGE it’s top allocations are China and Taiwan.  But unlike VGE, VAE has decent exposure to Korea and Hong Kong.  It holds about 1,300 companies compared to roughly 5,000 for VGE.  

What’s not included:  Other emerging markets like Latin America and the Middle East.  And developed markets.

Management expense ratio (MER):  The management fee is 0.40% per annum, so a little cheaper than VGE.

Pros:  If you want to take a long term bet on Asia, this is the way to do it.  You may also prefer the breakdown of countries compared to VGE.

Cons:  Higher fees than a developed markets index.  Plus, with VAE, you’re really taking a bet on a region which may or may not turn out in your favour.

 

Other global…

Vanguard All-World ex-US Shares Index ETF (VEU)

What does VEU invest in?  VEU invests in everything outside the US, including emerging markets and small companies.  VEU holds almost 3,500 stocks from the following countries…

What’s not included:  The US, hence the name!

Management expense ratio:  VEU has a tasty low management fee of 0.09% per annum.

Pros:  A great way to compliment a US fund like VTS (see above).  Combining VTS/VEU gives you the entire world market, including emerging markets and small companies.  It could also serve as an alternative international index fund for those who think the US market is too expensive.

Cons:  VEU is domiciled in the US, so it comes with tax issues like VTS as mentioned earlier.

 

Common combinations…

Enough of this glancing around.  Here are the most common pairings for international index funds for investors who want to get global exposure…

One developed market fund and one emerging market.  This would be VGS or IWLD for developed, and VGE or VAE for emerging.  For those who include emerging markets, a common allocation is about 5-15% of their total portfolio.

An alternative is to go with VTS and VEU for a combined and complete global exposure.  With the US being about 50-60% of the global market, and VEU making up the other 40-50%, it’s a pretty neat combo.  The problem is the tax issues mentioned, which are not ideal, nor are they easy to understand!  

 

A product idea…

Unfortunately, investing internationally is not quite as simple or cheap as it is for our friends in the US!

What we really need is a Total World ex-Australia index, that is also domiciled here so there’s no tricky tax concerns.  The fund would own everything outside Australia – just like VTS and VEU in one fund.

Then all an investor has to do is decide how much they want to invest in international shares. 

Hopefully one day an index provider will create this fund to make things nice and simple.  Either that, or maybe Vanguard will convert VTS and VEU into Aussie based funds – that would be good enough.  

I did actually email Vanguard about this a while back, but they informed me they are working on other things.  It’ll be interesting to see how this space evolves over the next 5-10 years.

 

All-in-one?

Okay, this one isn’t strictly an international fund.  It’s more like an all-in-one fund which is heavily invested in international shares.  The veterans will know this option, of course it’s…

Vanguard Diversified High Growth Index ETF (VDHG)

What does VDHG invest in?  This fund holds a portfolio of ETFs.  Together, they form a globally diversified portfolio, which includes Aussie, international, emerging market and small cap shares. 

VDHG has 90% allocated to ‘growth’ assets, and 10% allocated to so-called ‘income’ assets, like fixed interest and bonds.  Here’s the full breakdown…

What’s not included: …nothing as far as I know.  Everything’s there in one fund.

Management expense ratio (MER):  The fee for VDHG is 0.27% per annum.  On the surface, that may sound expensive compared to other options here.  And it is, but..

Pros:  The simplicity of an all-in-one fund is pretty neat.  For those who don’t want to decide where to invest, rebalance, or just take a 100% hands-off approach, VDHG is a solid option.  Outsourcing the decision-making could be a mental and practical benefit worth paying for.

Cons:  VDHG holds multiple ETFs and rebalances to stay within its target range of exposure for each holding.  This means it buys/sells each year to maintain the same weightings, making it less tax efficient than doing it yourself.  Ideally, you’d simply add money to the holding that is underweight and no selling is needed.  It’s roughly the same in retirement, when it’d be better to sell the best recent performer from your portfolio to get some cash.  

(Betashares has released a similar fund in the last 12 months – Betashares Diversified High Growth ETF – using their own ETFs and some from other providers.  Not covered here – this post is already too long!)

 

Why I chose to invest in VGS

From all these options, I’m investing in VGS.  The reason is, it offers fairly broad exposure with one fund at low cost, to sit snugly alongside our Aussie shares.

The goal wasn’t maximum possible diversification.  Instead, I see diversification as insurance against the off chance that Australia does poorly over the next few decades.  And I don’t need to own every stock from every country in the world to do that.  But maybe I’m more relaxed than others in this area.

Why no emerging markets?  Simply because I choose to invest heavily in Australia, and we have strong ties with emerging countries due to our resources, immigration and so on.  Because of this, I think VGS compliments our portfolio more, so I don’t feel the need for emerging markets.

But I won’t try to avoid emerging markets specifically.  So if they were part of a broader global index (or VTS/VEU) that’d be fine.  And while I’m open to another option coming along, I consider VGS good enough for my purposes right now 🙂

 

Other options we haven’t covered….

There are plenty of other combinations and options that we could point out, but these are probably the most noteworthy.

I’m often asked about my thoughts on other types of funds, which are usually more exciting and exotic.  These are always higher cost, higher turnover, less diversified and less easy to understand!  Not only that, but they’re often a specific bet on a sector, strategy or theme.

Call me boring, but I tend to not bother looking at many options these days.  I’ll just stick with broadly diversified index funds, and buy-and-hold style LICs.  

 

Let’s talk about performance…

More often than not, people look at what’s done well for the last 10 years and look to double down on it.  What comes to mind here is US tech stocks and anything growth related.  And who can blame them?  Look at these returns…

Date:  September 2010 to September 2020.
US market:  17.3% per annum.
AUS market:  7.9% per annum.

Wow!  This has led many people to believe the US will outperform forever.  But before we get carried away, let’s remember that start and end dates play a huge role.  Here’s what happened during the previous 10 years…

Date:  September 2000 to September 2010.
US market:  -5.9% per annum.
AUS market:  7.8% per annum.

Yes, that’s a minus!  An even bigger contrast!  The US was unfortunate to experience two large crashes during that time period (tech crash and GFC), whereas Australia only really had one (GFC).  Now let’s look at both periods together.

Date:  September 2000 to September 2020.
US market return:  5.0% per annum.
AUS market return:  7.6% per annum.

(figures from the Vanguard interactive index chart)

What does this prove?  Well, nothing really.  But it tells us that looking at certain start and end dates can have an impact on our view of the world and affect our decisions.  

Things like this have tended to even out over the long term, with both countries doing better at different times and both having similar long term returns after inflation since 1900.  Granted, the US has outperformed overall since 1970.

Either way, it’s probably best to avoid assuming that one factor, region or strategy will keep on winning.  This has been written about countless times by people much smarter than me.

 

Which direction do you take?

We’ve come full circle now.  We’ve looked at the main options and now it’s up to you to decide. 

Clearly, my favourites are those which offer a balance of solid diversification, simplicity and low cost.  But there isn’t a ‘best’ option! 

Which option sounds like a good fit for your situation?  Do you want maximum diversification?  Or do you consider one international index fund good enough?  Do emerging markets make you nervous?  Or do you think they have great potential?  

A quick word on fees:  while fees matter to our investment returns, I wouldn’t simply go for the cheapest option here.  That’s because fees for all these funds will likely keep falling over time, as they have since the beginning of index funds over 40 years ago. 

There’s a psychological aspect to consider too.  If you invest in markets that you genuinely believe are going to do well long term, it will be MUCH easier to stay the course during a nasty downturn.  

But if you invest in something you’re less convinced of (maybe because you see other people own it), you can easily talk yourself into selling if that fund underperforms for a long time. 

At the end of the day, it really comes down to how you want to invest.  Maybe you only want to own Aussie and US shares.  Maybe you want to copy the breakdown of the entire global market.  Or maybe you just want the simplest option of all, in which case you might go with a ready-made fund like VDHG.

Whatever you do, just keep it simple.  Pick something you’re comfortable with and get started.  As most people do, you’ll probably adjust your plan over time, so there’s no need to stress and feel like it’s a ‘forever’ decision.

What if I had to suggest something to get started with international investing?  Pick a broad global fund (covering most international markets), or a US fund at a minimum (the biggest market) and go from there. 

If you feel it makes sense to diversify more than that, then by all means go for it.  But adding one of these gives you most of the benefits of diversification with just one fund.

 

Final thoughts

I hope this article has helped you compare the most common international index funds.  We covered a range of sensible low cost diversified options for long term investors.

It’s clear to me there’s no right answer, except what suits you and your personal circumstances.  Don’t get me wrong, making sensible investments is important.  But I think the FIRE crowd tend to overanalyze and nitpick the investment world to death.

We spend too much time worrying about the unknowable future and thinking about all sorts of risks.  We forget that we’re already on the extreme end in terms of financial security, personal adaptability, and the diversification of our wealth and income streams.

Whichever path you take, I wish you all the best.  And remember, the input (your savings rate) is more powerful than the output (your investment returns), especially when it comes to early retirement.  So remember the bigger picture.

52 comments

  1. Hey Dave, any decent international LICs you’re aware of?

    I was thinking WGB for example?

    What do you think of that?

    Thanks mate
    Elliot

    1. Hey Elliot. None that I find super attractive. I like some of the managers, but most have very high fees, or are very high turnover. WGB has high fees and likely to be very high turnover, considering the manager running that fund.

  2. Brilliant piece here. Very well done! Very much in line with my own readings.

    In fact, at the time I got the email notification re this post I am editing a video about my portfolio which includes VGE and IWLD.

  3. Hi Dave
    NDQ is unhedged. If you are concerned about currency fluctuations you can use HNDQ
    Beside VDHG, Vanguard also have VDGR,VDBA and VDCO to suit different risk profiles

  4. Ah that sweet Saturday SMA fix 🙂

    Thanks again for another great article. I am currently 100% invested in Australia, a by product of Peter Thornhill being my first influence in regards to investing.

    However I plan to start diversifying internationally next year, even before this article I was thinking VGS was a great option also. The large spread of countries/companies and the large footprint of IT and healthcare (relative to Australia) coupled with it being domiciled in AUD makes it an nice first foray out of Australian equities for us.

    1. Haha! 😀
      Sounds good mate. Yeah, I think the different makeup of industries in the US really compliments what we have here in Oz.

  5. What are your thoughts on currency hedging Dave? I have some international investments which are hedged (VGAD) as well as others which aren’t, with a roughly 50/50 split between hedged and unhedged.

    1. Hey mate. It’s not something I’ve done much research on. Given I’m likely to remain more than 50% invested in Australia, I probably won’t bother with it. Having said that, I might buy VGAD if the Aussie dollar was very low, like in the 50c range, but that’s about it. And I’d probably look to get rid of it once the currency went back into a normalish range (60-80c) like what happened earlier this year.

      Sounds a bit too active doesn’t it? Haha. As you know, it probably just depends how much someone has invested in Australia, whether hedging is likely to be desirable or not.

      1. If diversification outside Australia is the intent (rather than trying to play the currency fluctuations theme), then unhedged version perhaps makes more sense. As the AUD is more or less a global risk appetite barometer, in falling markets non‐Australian exposures would do better in AUD terms, cushioning the portfolio a bit against the shock. This year, I was happy to see that VGS didn’t fall that low and recovered faster than VAS, which is still in red YTD. The opposite would be true in case of risk-on sentiment, but I’m ok with talking less upside but having a smoother ride in hard times. Again, it’s only a personal perspective…

  6. Hey Dave, useful post.

    I’m curious to hear your thoughts on VESG vs VGS. From what I can decipher, the fees are the same and top holdings relatively on par – can you see any downsides?

    Cheers

    1. Thanks Vanessa. The ethical funds are fine if that’s what you want to go with and fees are the same, which it is in this case!

      The main issue is if the companies they’ve excluded end up having better performance than the rest of the fund, then the ethical fund will underperform. Then there’s the fact that it doesn’t really hurt those companies if you don’t buy their shares. There are other points but I’ll save them for a future post on ethical funds.

  7. I found this post particularly good I like the product breakdowns

    I only buy au domiciled and I too wish for some comparable products to be domiciled here

    Thanks for the post your the man Dave

  8. Hi Dave
    Im beginning my FIRE journey. Thank you for sharing the gyan to the world. Lots of good karma to you mate!
    This may be a novice question. Why is there a marked unit price difference between VTS and IVV? (VTS and IVV are trading AUD251 and AUD493 resp.) Is it because VTS tracks the whole US market, whereas IVV tracks S&P500. Or is there something else to it? As a prospective buyer, I am puzzled at why Id buy IVV when i can buy VTS for half the price (ignoring tricky tax issues).

    TIA,
    Sam

    1. Hey Sam. The unit price of each ETF compared to each other actually doesn’t matter. You’ll earn returns based on the dollars you’ve invested, not the number of shares you’ve been able to buy. If you invest $5,000 to buy 100 shares, and $5000 to buy 1 share, you won’t get 100 times more returns with the first one. If the underlying fund is basically the same, you’ll get the same return – one just has the pizza cut up into smaller slices.

      The main difference is the one you point to – one tracks the top 500, the other tracks those, plus another 3000 or so. So it includes more companies (including small ones) and so it’s slightly more diversified. But honestly, they are likely to have almost identical performance over time.

  9. Hi Dave – while in theory there *could* be US estate tax implications if you drop dead and have a lot of something like VTS sitting there, in practice I think it’s very unlikely Uncle Sam would go after it. They’ve got bigger fish to fry. This was once discussed by Scott Pape as well and he was of the same opinion. And so the only real hassle with VTS and VEU is the form that has to be completed every few years and a bit of extra number crunching for your annual Aussie tax return (which I am about to do tonight). So all up, not a deal breaker for those who want to own VTS and VEU and enjoy the rock bottom fees plus wide exposure.

    1. Yeah I dunno Scott, it’s just one of those things most people would like to not have to worry about even as a remote possibility. It’s likely that Vanguard end up re-domiciling (is that a word?) those funds in Oz at some point anyway, so it probably is a non issue 🙂

  10. On emerging markets
    https://www.etf.com/sections/index-investor-corner/swedroe-why-emerging-markets-matter
    https://www.etf.com/sections/index-investor-corner/swedroe-emerging-markets-need-time
    https://www.passiveinvestingaustralia.com/emerging-markets-is-crap-should-i-leave-it-out

    EM also tends to zig when the developed world index zags (over long periods, not during short sharp corrections).

    Here is EM vs World index since 2000
    https://www.passiveinvestingaustralia.com/images/em-vs-world.jpg

    And here it is going back a coulpe more years where total return over the period is even (rather than EM ‘s outperformance since 2000), and with log scaling added, so you can see the zig-zag nature that is useful for a diversification benefit.
    https://www.passiveinvestingaustralia.com/images/em-vs-world-log-scaling.jpg

    1. Thanks for that. Nice to see the correlation in overlapping graph form. I wasn’t saying people should ignore emerging markets (hope it didn’t come across like that). Just see a few people make the assumption (high growth economy must mean high growth stockmarket, sign me up!), but it’s not that easy.

      The diversification/rebalancing benefit can be useful, but it’s probably fair to say many people don’t have the patience/stomach/discipline for it in practice, especially when emerging markets are naturally less familiar than developed, and typically more volatile.

  11. Another great article Dave! I recently made my first foray into international shares by purchasing a parcel of VEU. I like the relative weighting of countries and the mix of developed and emerging economies in there. The low fees that go with VEU are a real plus of course. I’m of the same view that the US market is over-valued at present (scarily high CAPE ratio) so will keep my ‘powder dry’ for their next correction and swoop in and buy some VTS when there’s better value to be found. Something tells me we won’t have too long to wait…

      1. No not exactly. I’m actively putting my money into sharemarkets that I believe offer better value at the moment. The US market is overvalued at the moment so I am avoiding that particular market for the time being and investing elsewhere.

    1. Cheers Jeff. Nice work! It’s good to start somewhere, and if you’re more comfortable with other markets for now since they appear better value, I think that’s fine. The key point is you still have more diversification than you did before, even if it’s not what others would do 🙂

  12. Nice guide Dave. Hedging is also about what level of currency risk you’re willing to tolerate. For our portfolio we came to the conclusion (after going round in circles thinking about currency movements) that we wanted some currency risk but had no idea how the currency movements would go; so like AussieHIFIRE we ended up with a 50/50 split between hedged and unhedged.

  13. Great stuff Dave.
    Love the way you set it all out. Easy to read and digest.
    That performance segment really opened up my eyes. Very interesting and yes, all depends on the periods one looks at or refers to.

    For mine i recently (3 months ago) purchased VGS + IWD (and QUAL). Each to their own strategy but i think what is important is that one invests in whatever suits their long-term strategy. Do your research and invest. NOT investing can sometimes hinder wealth prospects severely.
    Of course that doesn’t mean bet everything on black at the casino :).

    1. Glad you found it useful! You bring up a great point – often people tie themselves up in knots trying to decide on the best way to invest, when really, the best thing they can do is just invest (provided they aren’t buying complete garbage funds).

  14. Currently my international exposure is solely through super… let them worry about the hassles of currency and tax. It’s been the star performer for the last 10 years from all its investment options. Not that this will continue of course, but happy to bank the returns while they’re there.

  15. What are your thoughts on VISM? No mention in your article or readers’ comments… I thought it would have been a major player in international shares talk..?

    1. I dunno, maybe elsewhere it is? If someone wants to add small caps then nothing wrong with that, but I think most of the benefits of diversification can be had with just one or two broad holdings, so small caps is mostly tinkering around the edges. It’s ultimately only a small segment of the market.

      It depends how ‘academic’ of an approach you want to follow. We can add international, then emerging, then small, then value, but where does it end? We can slice and dice it even further to get even more moving parts to add to/rebalance with, but I think this is just giving ourselves more work than is necessary.

  16. Just a thought on VDHG and the other Vanguard portfolio funds.

    Even if you don’t want to invest in a single fund their asset allocations provide a useful guide of how to structure your portfolio according to your risk appetite. For example, split between global fixed income and australian fixed income. International/emerging market/aussie.

    This is the sort of stuff professional financial advisors will charge the man in the street a hefty fee for. My organization has a hefty portfolio ‘managed’ by a well known firm, their asset allocation models are almost precisely the same as those you can deduce for free from the vanguard funds.

    1. That’s a good point Pierre, thanks. It’s certainly very cool that people can simply copy a pretty robust and well researched allocation if desired, without paying a fortune for it.

  17. Great article.

    One factor not mentioned is that the US based funds that hold Ex-US equities suffer from lost level 1 withholding taxes (IWLD, VEU and VGE) and franking credits (IWLD and VEU).

    As a result, what looks like a low cost MER, in real terms costs about the same as VGS which holds assets in Australia.

    VAE similarly holds assets in Australia unlike VGE which wraps NYSE VWO leading to a wider differential than 0.40% vs 0.48% at first glance.

    1. Cheers Rob. I mentioned there are tax issues and pointed to an article which explains it further – including the tax drag, even though I didn’t point that one out specifically. Maybe I should have.

      Wasn’t aware of the VGE issue though! Do you have more info on that?

      1. Sorry, missed the link, yes that’s a good summary of the issue.

        VGE suffers from exactly the same issue investing in 23 emerging countries. These countries withhold level 1 taxes on dividends which could normally be offset against your Australian income tax as Australia has double taxation agreements (DTA’s) with most of these countries. https://treasury.gov.au/tax-treaties/income-tax-treaties

        Except because VGE wraps the NYSE VWO ETF which holds the assets in the US, these level 1 taxes are lost to the tune of about 0.35% based on the latest annual report and you have to pay full Australian income tax on the distributions.

        1. Fascinating, I hadn’t read that before but it makes sense, thanks. Wow, when you add the fee and the tax drag, it’s getting up towards 1%! That’s really off-putting. Definitely makes the Australian based funds more attractive, but there’s a tradeoff with everything I guess.

          1. The frustrating thing is the MER on the underlying VWO is 0.10%. 0.10%+0.35% would be quite reasonable.

            Vanguard Australia is just taking profit with VGE as there is no low cost competition unlike VTS vs IVV. The nearest competitor to VGE is IEM @ 0.67% but also suffers from the same tax drag wrapping the US EEM ETF.

          2. Hopefully that money eventually finds its way back into lower fees for its broad products rather than creating new ones, which is getting a bit silly now – there is far too much choice

  18. I’ll also add, this effective MER on VGE may be high (0.48% + 0.35% tax drag), however giving it is usually only around 10% of a balanced portfolio it lessens the impact.

    In my mind VAE was a good enough approximation at around half the cost (0.40%), although misses out on Brazil, Russia, South Africa and a few other countries and also doesn’t include China A shares found in VGE.

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