Uncertainty is on the rise in the financial markets, prompting many investors to reassess their fund strategies. Among popular options are VXUS and VTI, two exchange-traded funds (ETFs) from Vanguard that offer diversified exposure with low expense ratios. Understanding the differences between these funds is crucial for making informed investment decisions, especially in light of potential market volatility.
VXUS, the Vanguard Total International Stock Index Fund ETF, aims to track the performance of a broad index of foreign stocks, excluding U.S. holdings, except for cash and equivalents. The fund includes companies from various regions, including emerging markets, Europe, the Pacific, the Middle East, and North America. It also operates on a market cap-weighted basis, reflecting the relative size of the companies it holds.
Conversely, VTI, or Vanguard Total Stock Market Index Fund ETF, reflects the performance of the entire U.S. stock market. It features nearly 3,500 U.S. stocks across all economic sectors, with a significant emphasis on technology, representing over 39% of its portfolio. The top two holdings—Nvidia and Apple—alone account for more than 12% of the fund. VTI provides a quarterly dividend with an SEC 30-day distribution yield of around 1%.
A closer examination of historical performance reveals that VTI has outshone VXUS over the past decade, yielding an average annual return of 14.73% compared to VXUS’s 9.39%. This trend aligns with the broader performance of U.S. mega-cap technology stocks, which have outperformed international markets for nearly two decades. Nevertheless, VXUS has recently gained traction, growing over 34% in the past year and about 10% year-to-date, surpassing VTI’s returns of 31.4% and 6%, respectively.
When considering fees, both funds exhibit low expense ratios common among Vanguard offerings. VTI charges an expense ratio of 0.03%, while VXUS has slightly higher fees at 0.05%. For every $10,000 invested, these fees translate to $3 and $5 annually, respectively.
In terms of diversification, VTI holds a broad array of U.S. stocks segmented across various sectors, with technology as the most represented sector. VXUS, on the other hand, features an extensive mix of 8,770 international stocks, with the largest shares coming from Japan, the United Kingdom, Canada, and Taiwan.
The performance of these ETFs under fluctuating market conditions has revealed both to be susceptible to economic downturns. Notably, during the COVID-19 crisis, VXUS experienced a steeper decline than VTI. An analysis indicated that, between 2001 and 2010, international stocks outperformed their U.S. counterparts, but recovery rates post-Global Financial Crisis differed significantly, with VTI rebounding far quicker than VXUS.
Additionally, investors should consider tax implications. VXUS provides the foreign tax credit that can offset U.S. tax liabilities, an advantage for international holdings. However, more than 40% of VXUS’s dividends are classified as nonqualified, subjecting them to ordinary income tax rates, which can be as high as 37%. In contrast, VTI offers a higher percentage of qualified dividends, taxed as long-term capital gains at lower rates, ranging from 0% to 20%.
For investors contemplating which fund might better fit their portfolio, the decision often hinges on individual asset allocation strategies. VTI serves as a robust core holding with its extensive U.S. stock exposure, while VXUS offers vital diversification for those lacking international stocks. Holding both may provide complementary benefits, allowing investors to tap into both U.S. equity opportunities and global markets.
In conclusion, while each fund boasts unique advantages and historical performances, investors are encouraged to consider their personal financial goals and market outlook when deciding between VTI, VXUS, or a combination of both.
