The Vanguard Total World Index ETF: A Mixed Reception
About 20 years ago, Vanguard launched its Total World Index ETF (VT). Even though there are clear benefits to these types of funds, they’ve struggled to gain traction, especially among investors focused on low-cost index mutual funds.
One reason for the lukewarm reception was that it was offered as an ETF rather than a traditional mutual fund. At the time, many, including investing pioneer Jack Bogle, viewed this new breed of ETFs as potentially risky and speculative (it wasn’t until 2019 that a traditional fund version was introduced).
Another challenge was that VT debuted during the summer of 2008 and soon lost a significant portion of its value—around 50%—in the subsequent months. Consequently, the performance charts weren’t particularly encouraging for a while.
Moreover, investors discovered that they could replicate VT using its underlying components, specifically the Vanguard Total Stock Market Index Fund (VTI) and the Vanguard Total International Stock Market Index Fund (VXUS), at a lower cost than purchasing VT itself. While VT may have become somewhat less expensive over time, it was still pricier compared to the alternatives, which has somewhat changed. Currently, VTI has an expense ratio of 3 basis points, VXUS is at 8, and VT stands at 10 basis points.
Many investors initially felt that VT was too weighted towards international stocks. In its early days, a large portion of VT consisted of non-U.S. equities. For roughly 15 years, U.S. stocks did outperform, but that trend seems to be evolving. Presently, VT holds 62.9% U.S. stocks, which means the initial concerns are somewhat alleviated. Still, some investors prefer a heavier U.S. orientation in their portfolios.
As the years rolled on, there’s been some redemption for the fund. It seems prices are trending lower, plus there’s a push toward a more simplistic approach to portfolio management. No one wants to obsess over the perfect allocation of international stocks when they can invest in a fund that represents the overall market.
Still, I haven’t personally invested in VT yet. Here’s why:
#1 Portfolio Simplicity Isn’t Everything
VT is designed for those who appreciate a straightforward investment approach, much like Targeted Retirement or Lifecycle Funds. While it does eliminate individual asset classes and simplifies things by focusing solely on stocks, my portfolio already includes a variety of asset classes—four equity types, two in fixed income, and three in real estate. So, for me, simplicity isn’t the top priority in asset management.
#2 Cost Concerns
Despite reductions in costs, VT is still about 5 basis points more expensive than its components. A 5 basis point difference might seem minor, yet it’s easier to achieve the same functionality for less if you’re willing to put in a little extra effort.
#3 Desire for Control
My investment plan doesn’t specify sticking strictly to market capitalization weights on a global scale. It’s set to allocate two-thirds of investments in U.S. stocks and one-third in international stocks. In the past, I found VT lacking U.S. exposure. If the current trend of U.S. market growth continues, it may tip the balance the other way. Regardless, I prefer to manage this myself, opting for separate funds for that purpose.
#4 Taxation Issues
According to U.S. tax regulations, mutual funds that invest less than 50% in foreign equities can’t pass on foreign tax credits to their investors. Currently, VT doesn’t meet that threshold. By selecting a separate fund, investors can still claim foreign tax credit benefits on VXUS distributions, while those holding VT will miss out entirely.
#5 Tax Loss Harvesting
Supporters of direct indexing argue that owning a higher number of individual securities improves the chances of tax loss recovery. In this case, having two funds is preferable to one. Unfortunately, options for effectively trading VT to recoup tax losses are limited. iShares’ URTH excludes certain emerging markets found in VT, while another option, ACWI, comes with a higher expense ratio and offers less exposure overall. Although Invesco’s PSRW is affordably priced and includes many emerging market stocks, its limited number of total stocks and larger value slope make it less ideal.
#6 Limited Popularity
Right now, you can trade U.S. and international stocks separately, and yet VT hasn’t gained enough popularity. Very few 401(k) and similar plans feature VT, unlike more popular choices like VTI and VXUS. If it’s not available in your plan, you simply can’t invest in it.
When VT Might Make Sense
So, does VT have a place? Well, my daughter just made her first contribution to her HSA, opting for an all-stock approach. VT, being an ETF, can be traded without fees on Fidelity, where her HSA is managed. With a single ETF, she avoids the complexities of balancing asset allocations. Plus, since it’s in a tax-sheltered account, the matters of tax loss recovery and foreign tax credits become irrelevant.
The additional expense for the year would be around $8,300 plus about 5 basis points, amounting to roughly $4.15—hard to feel too upset about that. As her account increases, there’s flexibility to change without any tax penalties. Right now, simplicity is key, and VT checks that box. Some individuals might also find it appealing when starting a Roth IRA for themselves or their kids.
In conclusion, even though VT can serve as a straightforward stock ETF solution, many investors remain hesitant to utilize it due to the reasons highlighted above.
