Today’s economies are more interconnected than ever. Thanks to innovation and the Internet, traveling and trading across borders is easier. Naturally, this shift is reflected in investment portfolios. Although the U.S. stock market is the largest globally and many major firms operate there, there are plenty of promising international stocks to consider.
For many individual investors, exchange-traded funds (ETFs) are a practical way to gain international exposure in their portfolios. International ETFs help navigate the complexities of language and regulations when dealing with foreign markets.
Two notable ETFs that focus on markets outside the U.S. are the Vanguard Total International Stock ETF and the Vanguard FTSE All World (Ex-U.S.) Small Cap ETF. Vanguard is a reputable name in the ETF space, but there are significant differences between these two funds.
So which ETF is the better option? Well, it might depend on your preferences.
Understanding the nuances of investing in markets beyond the U.S.
To invest globally, it’s crucial to differentiate between developed and emerging markets.
If you’re accustomed to the U.S. stock market, it can be easy to overlook its stability. Certainly, there are speculative stocks and firms with a high potential for failure. But, overall, the U.S. economic and regulatory systems offer an uncommon level of security not found in many other nations. Developed markets include the U.S., along with established countries like Japan, Sweden, and France.
On the other hand, emerging markets present significant growth opportunities yet come with higher risks due to their instability. Countries such as India, Brazil, and South Africa fall into this category. It may be wise to have investments in both developed and emerging markets, but it’s essential to grasp the distinctions and how an ETF aligns with either type.
Comparing these two Vanguard ETFs
Both of these Vanguard ETFs offer compelling advantages.
They both carry Vanguard’s reputable name, with a minimum investment of just $1, making them accessible to various budgets. Plus, both have low expense ratios. The Total International Stock ETF has an expense ratio of only 0.05%, while the FTSE All-World ex-US Small-Cap ETF is a bit higher at 0.06%. That works out to just $5 and $6, respectively, for a $10,000 investment. This simplification allows investors to avoid the headache of sifting through numerous non-U.S. stocks.
Both ETFs show similar levels of exposure to emerging markets. The Total International Stock ETF has 26.3% invested in such markets, and the FTSE All World Ex-U.S. Small Cap ETF is a bit more aggressive at 28.7%.
The main distinctions between the ETFs relate to their overall strategies and makeup. The Total International Stock ETF invests in thousands of stocks with a median market capitalization of around $54.8 billion, while the FTSE All-World ex-US Small-Cap ETF, as indicated by its name, targets small-cap stocks with a median market cap of approximately $2.5 billion.
Small-cap stocks can be more volatile but have the potential for greater long-term growth. This is illustrated in their historical performance. The FTSE All World ex-U.S. Small Cap ETF has delivered an annualized total return of 9.79% since 2009, significantly surpassing the Total International Stock ETF’s 6.73% since 2011.
Which ETF is better?
There’s a common understanding that higher risk often correlates with higher rewards. The FTSE All-World ex-U.S. Small-Cap ETF boasts an impressive history, but investing in small-cap stocks outside the U.S. can certainly be a wild ride. If that sounds appealing, it might be the right choice for you.
However, not every investor may want such volatility, depending on their age, risk tolerance, or other considerations. If that’s the case, the Total International Stock ETF might serve as a better fit. Remember, both ETFs come from Vanguard and share similar fees and minimum investments. Ultimately, your personal comfort with either option will guide your decision.
