Last time we compared two index funds, we pitted FZROX against VTSAX.
That was an example of looking at the same kind of fund (a total stock market index fund) offered by two different companies (Vanguard and Fidelity).
Today, we’re comparing two different kinds of funds (domestic stocks vs international) from the same company (Vanguard).
Here are the two we will be looking at:
- VTSAX: Vanguard’s Total Stock Market Index Fund
- VTIAX: Vanguard’s Total International Stock Index Fund
We’ll compare them on their holdings, costs, and several other categories.
Given that we’re comparing a domestic stock fund and an international stock fund, this is where the real difference lies.
Here are the top 10 holdings of each fund at the time of writing this post:
|1||Taiwan Semiconductor Manufacturing||Apple Inc|
|2||Tencet Holdings||Microsoft Corp|
|3||Alibaba Group Holding||Amazon.com Inc|
|4||Samsung Electronics Co||Alphabet Inc|
|6||ASML Holding||Tesla Inc|
|7||Roche Holding||JP Morgan Chase & Co|
|8||LVMH Moet Hennessy Louis Vuitton||Berkshire Hathaway|
|9||Toyota Motor Corp.||Johnson & Johnson|
All of the domestic holdings of VTSAX should be familiar. Probably half the international companies of VTIAX are recognizable to most people.
What the “Total” Means in “Total Stock Market Index Fund”
VTSAX is designed to give you exposure to the whole US stock market. Not a particular sector. Not the biggest companies. The whole market.
Sometimes you’ll see funds that are listed as “large cap” or “small cap.” The “cap” stands for “market capitalization”—how much all shares of a company together are worth. Large companies like Apple and Amazon are “large cap.” With a total stock market fund like VTSAX, you are invested in large cap, small cap, and everything in-between.
Right now, VTSAX owns stocks from 3,781 different publicly traded U.S. companies.
What the “Total” Means in “Total International Stock Index Fund”
Often, the international stock market is divided into several sectors. For instance, you could invest in developing markets or you could invest in the more established markets of places like Germany or the U.K.
With a total international stock index fund, you get exposure to everything.
Here’s VTIAX’s most recent composition:
Overall, VTIAX holds a staggering 7,554 stocks (for reference, that’s nearly double the amount of publicly traded companies in the U.S.)
The main fee we need to be worried about is the expense ratio. This is a fee that is quietly deducted each year as a percent of the assets you hold in the fund.
Vanguard consistently has very low fees, but they have to charge something to stay in business.
Here’s how the expense ratios compare:
Both are fantastically low, but VTIAX’s 0.11% is almost triple VTSAX’s 0.04%.
One thing that it’s important to remember in investing is that fees matter. Any dollar you pay in fees doesn’t compound for you over time, and the losses really add up.
For a full breakdown of the true cost of fees, see the post The Tyranny of Compounding Costs.
Of course, these are from the same company and reflect the fact that it’s more expensive to invest abroad. A higher expense ratio is the price of admission for international exposure.
Both funds carry one other fee: A yearly $20 account service fee that applies to certain balances under $10,000.
Both funds are identical in this respect. There’s a minimum of $3,000 to invest and—like we just looked at—a fee for having less than $10,000 invested.
Avoiding the Minimums With ETF’s
ETF stands for “exchange-traded fund.” There are a few differences between ETF’s and index funds, but most of them don’t matter to the long-term investor. For instance, the biggest difference is that ETF’s can be traded during the day, while Index Funds are bought and sold at the end of day price.
For both VTSAX and VTIAX, you can avoid the minimums by investing in the ETF equivalents which can be bought for the price of a share.
|Index Fund||ETF Equivalent||Current Share Price|
These ETFs have the added benefit of having slightly lower expense ratios than their index fund counterparts.
While I think Vanguard is a great company, this is my biggest problem. Ideally, you would have funds with no minimum investments and no fees for low balances.
The worst part about it is that these shortcomings hurt beginning investors the most and serve as a barrier to getting started, which I’m not a fan of.
The phrase “turnover” refers to a fund selling its existing holdings and buying new holdings. It’s relevant for two reasons:
- Buying and selling forces the fund to pay transaction costs such as commissions which can hurt the performance of the fund
- Turnover might result in more taxes for the investor who holds the fund in a regular taxable account (as opposed to a tax-protected retirement account like an IRA)
When it comes to turnover, a lower turnover percentage is always better, especially for those investing in the fund in a taxable account.
|VTIAX Turnover Rate||VTSAX Turnover Rate|
By this respect, VTSAX is better and should be more tax-efficient when held in a taxable account.
The Bottom Line
It’s impossible to know which fund will provide better returns in the future.
Usually, international funds are more volatile than domestic ones, and volatility is one of the primary sources of risk that investors need to be concerned about.
Of course, the way to reduce volatility is to diversify across asset classes. A group of Jack Bogle disciples calling themselves “Bogleheads” advocate a three-fund portfolio where you hold the following asset classes:
- Domestic Stocks
- International Stocks
The idea is that if any one of these asset classes takes a dip, you will have the opportunity to make money in the other two. You can then force yourself into a “sell high/buy low” transaction where you sell the assets that performed well to buy the one that dipped (this is called “rebalancing”).
So for most investors, domestic stocks and international stocks aren’t competitors, but complements as part of a balanced portfolio.
If you wanted, you could skip the international stocks and just go with a mix of domestic stocks and bonds, but many investors like the potential upside of international exposure