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Has Foreign Indexing Gotten a Bad Rap?

We take a look at the evidence--and the options.

Brian Portnoy, 03/05/2002

<P><EM>This article originally appeared in</EM> <A href="http://advisor.morningstar.com/productpages/Mstr_FundInvestor.asp" >Morningstar FundInvestor</A><EM>, an award-winning newsletter that presents investment strategies and tracks 500 funds.</EM></P> <P>The debate over active versus passive management is as relevant to foreign investing as it is to investing here at home. The essential question is: Should investors buy an index fund that tracks a basket of foreign stocks or bet that an active portfolio manager can beat the index?</P> <P>At first glance, the evidence for indexing foreign markets is weak. Over the past decade through the end of 2001, the average actively managed foreign-stock fund returned 6.3% per year on an annualized basis. The comparable mark for the MSCI EAFE index, a widely accepted benchmark for international-stock performance that aggregates 21 individual- country indexes, is 4.5%. Active managers, on average, have beaten the index over the trailing three- and five-year periods as well.</P> <P>Yet a look behind these numbers suggests that it’s premature to proclaim victory for active management.</P><B> <P>A Closer Look</P></B> <P>Several issues are worth considering. The first is the makeup of the index itself, particularly the benchmark’s oversized stake in Japan. MSCI EAFE has long emphasized Japan more than most fund managers have. For example, the index currently parks around 22% in Japan, compared with the average foreign-stock fund’s stake of less than 17%. </P> <P>Over time, the underweight has been a boon, because the degree of Japan’s underperformance relative to Europe is extreme. Over the past 10 years, the average Europe-stock fund has gained an annualized 8.8%; the average Japan-stock fund is in the red over that period.</P> <P>Don’t these data actually add ballast to the active-management argument? After all, managers simply took advantage of better opportunities elsewhere. That’s true, but the fact that the large community of foreign-stock managers has so consistently and significantly underweighted Japan relative to the index calls into question the quality of the benchmark itself. In fact, Morgan Stanley Capital International, the organization that constructs the indexes, has recently revised its index, which (surprise!) will decrease its Japan weight. </P> <P>The reasoning is that the index should better reflect the publicly available shares (or "free float") of major foreign companies; because cross-shareholding is so common in Japan, the current index overstates the access mutual fund managers actually have to Japanese issues. Had MSCI EAFE's Japan stake been rightfully smaller throughout the 1990s, the degree to which actively managed funds outperformed the index would have been smaller.</P> <P><B>Region by Region</P></B> <P>Looking at only the broadest of indexes also conceals further complexities to the case for indexing overseas. Dividing the world’s marketplace into different regions reveals that stock-pickers have been more successful in some areas than in others.</P> <TABLE cellSpacing="0" cellPadding="0" width=350 border="0" > <P></P> <TD vAlign="bottom" align="left" bgColor="#999999" colSpan=5><FONT face="Trebuchet MS, Arial, Helvetica" color="#ffffff" size="-2" ><B> Active vs. Indexing: A Mixed Picture</B></FONT></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=110></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=60></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=60></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=60></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=60></TD> <P></P> <P></P> <TD vAlign="bottom" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Fund Average/Index</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>3-Year<BR>Return %</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>5-Year<BR>Return %</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>10-Year<BR>Return %</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>10-Year<BR>Standard<BR>Deviation</B></FONT></TD> <P></P> <TD colSpan=5><IMG height=5 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Foreign-Stock Average</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-1.67</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >2.34</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >6.32</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >15.77</FONT></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >MSCI EAFE</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.05</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.89</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >4.46</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >15.83</FONT></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >MSCI World ex-U.S.</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.50</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.13</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >4.60</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >15.77</FONT></TD> <TD colSpan=5><IMG height="1"0 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Europe-Stock Average</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-1.19</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >5.30</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >8.77</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >17.46</FONT></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >MSCI Europe</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.26</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >6.24</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >9.64</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >15.54</FONT></TD> <TD colSpan=5><IMG height="1"0 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Japan-Stock Average</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-2.82</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.25</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-3.96</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >23.13</FONT></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >MSCI Japan</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-6.43</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-8.06</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-3.94</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >22.81</FONT></TD> <TD colSpan=5><IMG height="1"0 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Div. Emerg. Mtk. Avg.</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >4.45</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.79</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.89</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >25.20</FONT></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >MSCI EMF</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >2.01</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-7.80</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.95</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >25.00</FONT></TD> <TD colSpan=5><IMG height="1"0 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <TD vAlign="bottom" align="left" colSpan=5><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" >Data as of Dec. 31, 2001.</FONT></TD> <P></P></TABLE> <P>Most Europe-stock managers have had a hard time outpacing the MSCI Europe index over the long haul, while the emerging-markets and Japan bogies have been easier to beat, especially over the past five years. </P> <P>Why such variance across regions? Efficient-markets theory explains some of the discrepancy. Where there is ample information on a particular market--such as on large-cap U.S. stocks and, increasingly, large-cap European stocks--it is difficult for a portfolio manager to add significant value over long stretches of time. Conversely, less is known about smaller companies from smaller markets, so there’s greater opportunity for active managers to pick winning stocks.</P> <P>It’s also quite possible that potential legal reform in emerging markets and Japan, combined with closer scrutiny from professional investors, will render such markets more transparent, suggesting that beating the indexes will only become more difficult in the future.</P> <P>One final consideration stands in the way of a clear victory for active management: insufficient historical information. The key foreign indexes have only been around since the late 1960s. (Standard historical studies of the U.S. equity market go back to the 1920s.) </P> <P>Even worse, there aren’t that many actively managed funds with 10-year records. In the foreign-stock group, there are 59 such offerings. The Europe-stock group boasts just 19 funds with track records of 10 years or better, and only four in the Japan group--hardly enough to make statistically significant arguments. </P> <P>In addition, one of the strongest arguments in favor of indexing is based on index funds’ ultra-low expenses. But because so few foreign funds--either index or active--have long track records, the advantage of index funds’ low-expense tailwind hasn’t yet been fully realized.</P> <P>So do these various considerations--index flaws, disparities in index success across regions, and a lack of long-term data--amount to an endorsement of an index approach to foreign-markets investing? No, but they do suggest that investors shouldn’t dismiss foreign indexing out of hand.</P><B> <P>Picking Foreign Index Funds</P></B> <P>To the extent that investors are interested in international index options--as either a replacement for or supplement to an actively managed fund--there remains one nagging practical problem: Which ones to buy? The "international index" fund crowd is much less homogenous than the S&P 500 index crowd, so investors must choose wisely.</P> <TABLE cellSpacing="0" cellPadding="0" width=350 border="0" > <P></P> <TD vAlign="bottom" align="left" bgColor="#999999" colSpan=5><FONT face="Trebuchet MS, Arial, Helvetica" color="#ffffff" size="-2" ><B> A Comparison of International Index Funds</B></FONT></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=140></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=40></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=40></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=70></TD> <P></P> <TD><IMG height="1" src="http://im.morningstar.com/images/clear.gif" width=60></TD> <P></P> <P></P> <TD vAlign="bottom" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B></B></FONT></TD> <P></P> <TD vAlign="bottom" align=right colSpan=2><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>3-Year Return %</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B></B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B></B></FONT></TD> <P></P> <TD vAlign="bottom" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Fund Index</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Before<BR>Tax</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>After<BR>Tax</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Min. Initial<BR>Invest. ($)</B></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" ><B>Expense<BR>Ratio (%)</B></FONT></TD> <P></P> <TD colSpan=5><IMG height=5 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Vanguard Ttl Intl St Idx <?XML:NAMESPACE PREFIX = MSTR /?><MSTR:SECURITY>VGTSX</MSTR:SECURITY></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.34</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.99</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >3,000</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.34</FONT></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Fidelity Spartan Intl Index <MSTR:SECURITY>FSIIX</MSTR:SECURITY></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-4.96</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.40</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >15,000</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.35</FONT></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Schwab Intl Index <MSTR:SECURITY>SWINX</MSTR:SECURITY></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.25</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.67</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >2,500</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.58</FONT></TD> <P></P> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >Dreyfux Intl Stock Index <MSTR:SECURITY>DIISX</MSTR:SECURITY></FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.76</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-6.04</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >2,500</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >0.60</FONT></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >MSCI EAFE Index</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-5.05</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >N/A</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >N/A</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >N/A</FONT></TD> <TD vAlign="top" align="left" ><FONT face="Trebuchet MS, Arial, Helvetica" size="-2" >Foreign-Stock Average</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >-0.68</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >N/A</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >N/A</FONT></TD> <P></P> <TD vAlign="bottom" align=right><FONT face="Trebuchet MS, Arial, Helvetica" color=#000000 size="-2" >1.11*</FONT></TD> <TD colSpan=5><IMG height=5 src="http://im.morningstar.com/images/clear.gif" ></TD> <P></P> <TD vAlign="bottom" align="left" colSpan=5><FONT face="Trebuchet MS, Arial, Helvetica" color=#999999 size="-2" >*Average for no-load foreign-stock funds. Data as of Dec. 31, 2001.</FONT></TD> <P></P></TABLE> <P>There are numerous choices that attempt to replicate the returns and volatility of the EAFE index, including Dreyfus International Stock Index <MSTR:SECURITY>DIISX</MSTR:SECURITY>, Fidelity Spartan International Index <MSTR:SECURITY>FSIIX</MSTR:SECURITY>, and a relatively new offering, Vanguard Developed Markets Index <MSTR:SECURITY>VDMIX</MSTR:SECURITY>. Another new fund, Vanguard Tax Managed International <MSTR:SECURITY>VTMGX</MSTR:SECURITY>, also tracks the EAFE index and attempts to minimize capital gains, so it’s a particularly good choice for taxable accounts.</P> <P>There’s also a comparable option to be aware of, which is the iShares MSCI EAFE Index Fund <MSTR:SECURITY>EFA</MSTR:SECURITY>. This is an exchange-traded fund that tracks the index. It costs 35 basis points per year and is also relatively tax-efficient. But investors who plan to invest regularly in this ETF (or any other ETF, for that matter) will incur substantial trading commissions that will likely outstrip the benefits of its low expense ratio. For those dollar-cost averaging, an index fund is a better choice.</P> <P>Other index-fund options chart their own course. Most prominently, Vanguard Total International Stock Index <MSTR:SECURITY>VGTSX</MSTR:SECURITY> is a fund of funds, made up of Vanguard European Stock Index <MSTR:SECURITY>VEURX</MSTR:SECURITY> (60%), Vanguard Pacific Stock Index <MSTR:SECURITY>VPACX</MSTR:SECURITY> (30%), and Vanguard Emerging Markets Index <MSTR:SECURITY>VEIEX</MSTR:SECURITY> (10%). Meanwhile, the approach at Schwab International Index <MSTR:SECURITY>SWINX</MSTR:SECURITY> is both distinct and simple: It owns the 350 largest non-U.S. companies.</P> <P>One of the major differences among these portfolios is their emerging-markets exposure. For investors who might not need or want additional exposure to smaller, riskier markets from their international index fund, the offerings that directly track the EAFE index are better choices than Vanguard Total International Stock Index. Another major difference is expenses. On this score, not surprisingly, the various Vanguard index options trump the competition. </P>

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