VXUS vs. VFWAX - Opinions?

[Threshkin]

Taking another look at the international component of my Traditional IRA portfolio.

I currently have my workers in VXUS but am concerned about the long-term ROI.

I am considering VFWAX as an alternative and would like some feedback.

I will not need this money soon.  The account will only be drawn down when RMD kicks in, provided i have not completed a ROTH conversion before then.

[HeadedWest2029]

What's the concern with VXUS long term? Since VFWAX inception VXUS has actually outperformed VFWAX slightly.  Either way, I doubt you'll see much divergence...practically identical holdings

[Threshkin]

What's the concern with VXUS long term? Since VFWAX inception VXUS has actually outperformed VFWAX slightly.  Either way, I doubt you'll see much divergence...practically identical holdings

The inception dates were very close, 9/2011 and 1/2011 but the returns since inception are quite different, 4.41% vs. 0.74%, advantage VFWAX.  This caught my attention.  The three and one year returns are very similar with VXUS having a slight advantage.  I agree that the top holdings and overall sector allocations are very similar.  The expense ratio is the same for both funds, 0.14%.

I may be focusing too hard on small details!

[HeadedWest2029]

Well yeah, because VXUS started earlier it fell from 1/2011 to 9/2011...just as VFWAX would have had it existed in 1/2011.  If you plop both in Google Finance with VFWAX as the primary fund, then add VXUS and zoom to All, you will get their side by side performance from 9/2011 onward, which is the only relevant time period to compare the two. 

[johnny847]

Whenever you are looking at Vanguard fund performance, it's much better to look at the performance of the investor shares version to get a longer time frame. They always introduce the investor shares first, and later introduce admiral shares.

So if you compare VGTSX (investor shares of Vanguard total international - VXUS is the ETF version of this) and VFWIX (investor shares of ftse all world ex us - VFWAX is the admiral shares version) you can see that the performance is almost identical.

[Threshkin]

Thanks Johnny.  Good advice.

Of course, this brings up another concern.  Looking at that long-term chart makes me very concerned about ROI.  That chart is horrible!

[HeadedWest2029]

Thanks Johnny.  Good advice.

Of course, this brings up another concern.  Looking at that long-term chart makes me very concerned about ROI.  That chart is horrible!

Yes, America has outperformed other markets over that time period, but will that be true for the next 10, 20, 30+ years? I wouldn't bet against it, but that really boils down to your worldview and desire for complete diversification.  You will find very smart people like Warren Buffet, Jack Bogle, Jim Collins, etc who downplay the need for international diversification, but plenty on the other side who think it's nuts to put all your eggs in one basket (again, whether or not you find that to be true personally).  I happen to have 20% in international, which is lower than what Vanguard puts in its target date funds, but putting zero in international seems a little weird to me. 

Jim Collins discusses his take:
http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

[Tyler]

VXUS and VFWAX (or the ETF version VEU to compare apples to apples) track very similar but different indices.  VXUS tracks the FTSE Global All Cap ex US Index, while VFWAX tracks the FTSE All-World ex US Index.  The most notable difference is that VXUS includes over 6000 stocks, while VFWAX includes about 2500.  VXUS is also the larger fund.  Both are just fine, and the results are extremely similar.  The larger issue is your focus on ROI for a single index fund rather than your overall investments.

The thing about individual fund charts is that you can't just look at them in isolation.  You have to consider the big picture of how each fund fits into your larger portfolio over time.  Pretty much every stock fund tanked in 2008 and would look bad on that chart, but that doesn't make them a poor long-term investment in a well-diversified portfolio. 

It's sorta like baking a cake.  If you only add individual ingredients that taste good on their own, you'd leave out the flour, eggs, and baking powder and would only add butter, sugar, and chocolate.  That may sound good theoretically, but it would make a pretty crappy cake. 

Just like baking a cake, you first need to learn how individual assets work and how they contribute to the overall recipe before you can prepare a good portfolio.  Here's some more info, if you're interested. 

[johnny847]

Thanks Johnny.  Good advice.

Of course, this brings up another concern.  Looking at that long-term chart makes me very concerned about ROI.  That chart is horrible!

Yes, America has outperformed other markets over that time period, but will that be true for the next 10, 20, 30+ years? I wouldn't bet against it, but that really boils down to your worldview and desire for complete diversification.  You will find very smart people like Warren Buffet, Jack Bogle, Jim Collins, etc who downplay the need for international diversification, but plenty on the other side who think it's nuts to put all your eggs in one basket (again, whether or not you find that to be true personally).  I happen to have 20% in international, which is lower than what Vanguard puts in its target date funds, but putting zero in international seems a little weird to me. 

Jim Collins discusses his take:
http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/

To follow up on that, here's a comparison of an investment portfolio of all US stocks (in blue) vs all international stocks (in red) vs 50/50 US/Intl (in orange)


Source: Portfolio visualizer
As you can see, from 1971 to 2013, international markets outperformed US markets (with a convergence point in 2004).

International markets have outperformed the US in the past. There is certainly reason to believe that it can happen again (notice how I said can, not will).

[BarkyardBQ]

VXUS and VFWAX (or the ETF version VEU to compare apples to apples) track very similar but different indices.  VXUS tracks the FTSE Global All Cap ex US Index, while VFWAX tracks the FTSE All-World ex US Index.  The most notable difference is that VXUS includes over 6000 stocks, while VFWAX includes about 2500.  VXUS is also the larger fund.  Both are just fine, and the results are extremely similar.  The larger issue is your focus on ROI for a single index fund rather than your overall investments.

The thing about individual fund charts is that you can't just look at them in isolation.  You have to consider the big picture of how each fund fits into your larger portfolio over time.  Pretty much every stock fund tanked in 2008 and would look bad on that chart, but that doesn't make them a poor long-term investment in a well-diversified portfolio. 

It's sorta like baking a cake.  If you only add individual ingredients that taste good on their own, you'd leave out the flour, eggs, and baking powder and would only add butter, sugar, and chocolate.  That may sound good theoretically, but it would make a pretty crappy cake. 

Just like baking a cake, you first need to learn how individual assets work and how they contribute to the overall recipe before you can prepare a good portfolio.  Here's some more info, if you're interested.

But very good fudge or frosting!

[Tyler]

But very good fudge or frosting!

Ha!  True.  :)

The thing about investments is that any one asset may taste like sugar one year and baking powder the next.  So you have to keep an eye on the big picture.