Build A Complete Stock Portfolio With Just Two ETFs: Vanguard Total US (VTI) and Total International (VXUS)

If you are constructing your own portfolio and like the idea of low-cost, passively-managed index funds, you should definitely be aware that just two ETFs that can provide you diversified exposure to stocks worldwide and all at rock-bottom fees. Given how many choices there are out there today, I can’t assume that everyone knows about these already.

The Vanguard Total US Stock index fund invests in over 3,000 stocks that represent the entire U.S. stock market, from small-cap to large-cap companies. The smallest company on their holding list is 100 shares of Qualstar Corp, worth a mere $200. The entire company is worth about $20 million. Compare that to the largest holding of Apple, worth $380 billion (that’s 19,000 times larger). The ETF and Admiral shares have a mere 0.07% expense ratio ($7 annually per $10,000 invested), which is taken out in tiny amounts daily out of the fund’s net asset value. That’s just 6% of what the average mutual fund charges. There are three versions:

  • Vanguard Total Stock Market ETF (VTI)
  • Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
  • Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

The Vanguard Total International Stock index fund invests in over 6,000 stocks that covers 98% of the world’s investable markets excluding the US (“ex-US”). This includes 44 countries from the “European, Pacific, and emerging market regions, as well as Canada.” The fund also includes both small-cap and large-cap companies from these countries. The ETF and Admiral shares charge a 0.20% expense ratio. Three versions as well:

  • Vanguard Total International Stock ETF (VXUS)
  • Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
  • Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)

This graphic shows you how these two funds relate to other Vanguard ETFs you may already be aware of:


(Source, brighter red text is added by me)

(I should also mention that there is the Vanguard Total World Stock ETF (VT), which covers the entire world in one tidy fund. However, it only holds 2,904 stocks total, which is nearly 2/3rds less than a VTI/VXUS combo. On top of that, it charges a 0.25% expense ratio, which is nearly double how much a VTI/VXUS combo would cost when weighted appropriately. I personally think the added diversification and lower cost is worth the hassle of owning two separate funds.)

Implementation

As of August 31, 2011, the world market value breaks down to about 42% US and 58% Ex-US. For simplicity, I chose to own VTI and VXUS in a simple 50/50 ratio as part of my target asset allocation. I rebalance back to 50/50 regularly using new cashflows, and also at least once annually. Bonds are a separate discussion.

Side note: The reason I thought of writing this is that I previously held Vanguard FTSE All-World ex-US ETF (VEU) as my primary international holding, which as you can see above is a subset of VXUS, but realize that VXUS only arrived earlier this year. I’ve shifted most things over already, but I have been hesitant to sell some of my taxable holdings because I’d owe capital gains taxes. I noticed yesterday that I am actually at slight loss now (yay?), so I am able to do some tax-loss harvesting by selling my VEU and swapping it for VXUS. Since they are not “substantially identical” funds, I am not subject to wash sale rules.

Comments

  1. This is some great information! I am looking to start a Roth IRA and was thinking I could just go to Vanguard’s site, pick out a fund like VFIFX and start contributing to it. As a guy who doesn’t know a ton about investing, but wants to be smart with my money, how much research and detail should I concern myself with when looking for a Roth IRA option? Thanks!

  2. Funny, I also noticed yesterday that my large gain in VFWIX had turned into a small loss, so I too jumped on the opportunity to swap it all out for VTIAX tax-free.

  3. You seem to be a big fan of Vanguard Funds. I’ve personally never had much luck with funds in general and have preferred to buy individual Corporate and Government bonds (both US and Foreign). In all cases my intent is to hold to maturity, so fluctuations in price don’t bother me in the same way that a Vanguard or other fund might.

    I’d be curious if perhaps someday you would share your opinion about the relative, safety, value and return on these two approaches.

  4. I like the idea of “owning the world,” and I think the best way to do that is based on world market cap as you discuss. To maintain this type of asset allocation, do you have any recommendations on where to find the most up-to-date market cap percentages for US and Ex-US? Thanks.

  5. Noticed that you have the number of stocks for VSUX and VTI got switched in error. VXUS has 6614 stock and VTI has 3324.

  6. For taxable accounts, is it better to go for the ETF or the equivalent mutual fund, assuming the expense ratio is exactly the same (in the case of some Admiral Shares funds)?

  7. adam williams says:

    What is the difference between the Investor Shares and the Admiral Shares?

  8. Thanks for this! I was completely unaware VXUS existed. I am going to look at swapping VEU too.

  9. @Austin – Opinions will vary, but I like Vanguard Target Retirement funds for starting out. Your savings rate is much more important than gaining 10% vs. 11% for example on a small amount of money. As your balance grows, then things like taxes will start playing a greater role.

    @David – I am okay with owning individual Treasuries as they all have equal credit risk, but don’t have the appetite to own individual corporate bonds. For a pretty low cost, I can own a little of hundreds of bonds with say $10,000 instead of just a few. That’s worth some basis points for me.

    @Andrew – You could just look at the portfolio holding of VT Total World ETF, and it’ll show you what % is US (and every other country).

    @Ron – Fixed, thanks!

    @Erik – The way Vanguard does things, the ETF and mutual funds are share classes of the same investment pool, so as I understand it they have basically the same tax traits. I personally like Admiral funds when I can, just because I don’t have to worry about things like premiums to NAV and bid/ask spreads. You do give up being able to trade intraday and with limit orders.

    @adam – You need to reach $10,000 in each of these funds to invest in Admiral shares of that fund.

  10. I’m am not sure VXUS = VEU+VSS. While VXUS holds some emerging markets, I don’t think VEU or VSS does.

  11. VEU and VSS hold emerging markets. They are “All World ex-US”. VEA does not hold emerging markets, only developed.

  12. @Austin – Well, you would be right to be holding bonds over the past decade. Stocks have been a big stinker. If you combine the “lost” decade for 20 somethings who are now 30 somethings with the high underemployment/unemployment of current 20 somethings, there is going to be some kind of retirement debacle in 30 to 40 years. All the models I saw had young people investing 15% of their income with an average of 8% growth. Unfortunately, that model only worked if you had your money in long-term bonds! 30 years to fill a 401K up to 1.5 million in today’s dollars just isn’t enough time.

  13. I have been looking at these two ETFs. Even though I am in Canada, I don’t think I’d mind having the 8% overlap in VSUX to get access to all 6000+ stocks. Wouldn’t need to have VWO either.

  14. I want to go from Mutual funds to ETFs due to low expense ratio. If I already hold the Vanguard mutual funds at Vanguard; would the switch be possible without any tax implications?

  15. Thanks for the information…. I was aware of VTI and have some in my portfolio, but wasn’t aware of VXUS. Will have to look into it.

  16. @John – Check out this post:

    Vanguard Mutual Fund to ETF Share Conversions

  17. Mickey Blue Eyes says:

    I have Vanguard Growth & Income in my Roth IRA. Unfortunately, it hasn’t done much of either lately. I’m considering moving it into Vanguard Total Stock Market (Admiral shares). Although “since inception” annualized return is less, everything up to 10 years is greater.

    Might the lower expense ratio help offset any benefit the fund manager may provide? Plus would be owning small and mid caps to compliment/offset the large cap holdings.

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