Advantages of Owning Vanguard Total US and Total International Stocks ETFs Separately

One of the most popular ways to build out the stock portion of a simple index fund portfolio is to own the following two Vanguard ETFs:

• Vanguard Total US Stock Market ETF (VTI), which tracks the CRSP US Total Market Index representing ~100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks.
• Vanguard Total International Stock ETF (VXUS), which tracks the FTSE Global All Cap ex US Index representing equity market performance in developed and emerging markets, including 48 countries and excluding the United States.

However, a lesser-known option is to own a single Vanguard ETFs that attempts to track all the investable stocks in the entire world:

• Vanguard Total World Stock ETF (VT), which tracks the FTSE Global All Cap Index, a free-float-adjusted, market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world.

You may already have noticed that VTI/VXUS together have a lower blended expense ratio than VT, at least partially due to how big they are and their economies of scale. This Elm Wealth article goes into detail about one of the major benefits of owning them separately in a taxable brokerage account: the ability to obtain the Foreign Tax Credit. VT is ~60% US stocks and thus does not qualify for the Foreign Tax Credit.

The net result of this is that VXUS effectively earns you an extra 0.23%, which when added to the expense ratio difference in a blended 60% VTI/40% VXUS portfolio ends up being worth 0.13% annually. The effect of an extra ~0.13% in essentially guaranteed extra performance every year (in a taxable account) is pretty significant and can really compound over time. I’m happy to see a number placed on this benefit.

The article includes other good points, with the overall takeaway being that owning both VTI and VXUS has a lot of notable advantages and only minor disadvantages. VTI and VXUS are my largest holdings by far, and I agree that it’s hardly any extra work to add the tiny bit of complexity of owning two ETFs (that mostly already rebalance automatically with price changes).