Vanguard Target Retirement Funds Changes: Increased International Exposure

A lot of people own Vanguard Target Retirement 20XX Funds, and I just noticed that Vanguard made an announcement that they will be making some changes:

  • The international equity weighting will be increased to 30% of the overall stock portion fund, up from about 20%.
  • Three of the funds (European Stock Index, Pacific Stock Index, and Emerging Markets Stock Index) will be replaced by a single fund, Vanguard Total International Stock Index Fund.
  • The Total International Stock Index Fund itself is making some changes. Its benchmark index will switch to the MSCI All Country World ex USA Investable Market Index, which differs from the previous index by adding exposure to Canada and Israel, as well as adding a ~13% allocation to small-cap companies.

All of these changes sound good to me, even if it is another example of Vanguard following the herd. The very first target retirement funds had no exposure to Emerging Markets. Emerging got hot, and then Vanguard added to their funds. Investors have been increasing their international exposure as well recently, and 20% was less than their competitors like Fidelity and starting to look old-fashioned. (Perhaps this is another move away from the philosophies of founder Jack Bogle.)

This also means most Target funds will consist of just three funds:

  • Vanguard Total Stock Market Index Fund
  • Vanguard Total International Stock Index Fund
  • Vanguard Total Bond Market II Index Fund

The stated reasons are for increased simplification and diversification (and a little less volatility perhaps), and not for any increase in expected future returns. Here’s a Q&A from Morningstar with Vanguard CIO Gus Sauter about the topic.

I still like this series of all-in-one funds for those people who like the idea of auto-pilot and have all their retirement savings in tax-deferred accounts like 401ks and IRAs. They are simple, reduce your stock exposure gradually over time, keep costs low, and rebalance regularly for you. You can also adjust your risk level by choosing a different target year.

I held the Vanguard Target Retirement 2045 (VTIVX) for a while. After selling it, I’ve found it very easy to let my asset allocation shift.

However, if you have both taxable and tax-deferred investment accounts, splitting up your bonds and stocks for optimal tax-efficiency can help you increase your after-tax returns.


  1. I personally hate these target funds. I don’t know why people use these target date funds. I guess if you are really clueless than it’s better than the typical 100% stocks or 100% bonds pickers. Otherwise you are best to roll your own asset allocation.

  2. Maybe they are shifting the exposure because they believe we will see more growth outside the U.S. I like Vanguard, they don’t do things without good reason. I little more diversification sounds good.

  3. I’m curious of what the difference of this changed fund will be as opposed to the FTSE All-World ex US fund?

  4. klein3351f says:

    First to Investor Junkie, what else would you have people do? I assume you are a financial planner who knows the best things to buy and places to put money? Good for you. I don’t have that education and every advisor and book out there tell you something different. So now we’re not supposed to use a target fund? The whole point of them to set it and forget it. I’m not going to check things and buy and sell on a daily basis. I have a job and a life.

    Also, for the blog author – I can’t understand this statement “I held the Vanguard Target Retirement 2045 (VTIVX) for a while. After selling it, I’ve found it very easy to let my asset allocation shift. ”

    So you sold it and then what? Bought something else? Shifted your own asset allocation? If you sold it, then there were no more assets to shift allocation.

  5. Well, for someone who plan to retire at 65 (though many of us don’t), the allocation is going to be similar to these target funds, anyway.

  6. @Bill – They will be becoming much more similar, while following two separate indexes, MSCI vs. FTSE. I think the MSCI index has more small-cap international exposure, which makes it more appealing to me. I’ll have to consider any tax consequences to switching, but in theory you could tax-loss harvest between the two.

    @klein3351f – I sold it to – as Investor Junkie said – “roll my own”. Mainly, I wanted to add REITS, put bonds separately in IRAs and such, and buy more TIPS which Total Bond doesn’t include. I don’t regret it, but it *is* more work to rebalance regularly. I think using these Target funds give you less opportunity to mess yourself up by tinkering.

    As Bogle said (paraphrasing), sometimes the enemy of a good plan is the pursuit of a perfect plan.

  7. @klein3351f Nope I’m self educated and never sold any financial products. Believe it not, it’s not as complex as CFP make it sound like. If you like a brain-dead portfolio that might be fine for you, but it’s not for me. To each their own. I’ll let you in a little secret on CFPs, they also don’t know where the market is going. With anyone it’s their opinion and estimates.

    Just remember the first rule of investing. No one cares more about your money than you do. There is no such thing as set it and forget. As the investors of Bernie Madoff what happened when they did that.

  8. Investor Junkie-

    Actually I think using Bernie Madoff is a terrible example for you to bring up. The people using him thought they had figured out a way to game the system and get amazing results year after year. Bernie Madoff is a good example of why Target Retirements are good…they keep you out of trouble.

  9. @Dave

    At least in the interviews I saw in the news the people trusted Bernie and thought the returns were great. Where there people trying to ‘game’ the system? Sure I’m sure some thought this.

    My point is: Your investments shouldn’t be a black box, and you should
    understand what assets it’s invested in. If you don’t, expect ‘gotchas’ that can affect your returns along the way. If course I’m not saying Vanguard is like Bernie. Your investments can affect your life in so many ways, yet people spend more time deciding what’s for dinner than understanding their investments.

  10. I don’t agree, I think Vanguard Target funds are just about as far away from a black box as possible, other than owning the funds individually. Mutual funds are some of the most highly regulated investments around, especially when compared to a hedge fund.

    The prospectus limits each of these component funds to passively following their stated index. The glide path of the retirement fund is also stated, with slight tweaks now and then, which are also announced.

    Other target-style funds may be different, as they are usually actively-managed to attempt to beat a benchmark. Buying a fund like Fidelity Contrafund or PIMCO Total Return gives them huge leeway into what they can invest in. Their investment changes on a monthly basis probably dwarf what an index fund changes in a year.

  11. Jonathan, are you sure that to sell the FTSE & buy the MSCI that it will not be a “wash sale”? I thought the rule was if you buy a “similar investment” that it would be a wash? I agree, I would prefer more small cap exposure as well, I think I will just buy VSS and then I can control my small cap percentage. Thanks for the explanation though, have a good one.

  12. @Bill – The rule says they can’t be “substantially identical”. I am not the IRS or a tax lawyer, but would make the argument that two funds that follow different indexes, one with a 10% allocation to small-cap stocks and one that does not, is not “substantially identical”.

  13. Maybe you guys can help me. My vanguard account has 49k in it. I am invested in the Vanguard Prime Money Market Fund. This fund has performed at the rate of .08% over the past year! I have heard the market has performed well this year and this should be higher!

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