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The Latest Developments in International Index Funds

What was once a sparse landscape is now overflowing with choice.

Greg Wolper, 09/13/2011

Ten years ago, investors who wanted to buy an index fund that invested outside the United States had a fairly simple decision to make. There were only four main contenders providing broad geographical exposure.

Fidelity Spartan International Index FSIIX and Vanguard Developed Markets Index VDMIX--like quasi-index fund Vanguard Tax-Managed International VTMGX--tracked the MSCI EAFE Index. Schwab International Index SWISX added a twist. Instead of tracking the MSCI EAFE Index, it owned the 350 biggest companies outside the United States, which gave it a slightly different portfolio, though the differences were not dramatic. Meanwhile, Vanguard Total International Stock Index VGTSX added an emerging-markets component to the standard EAFE portfolio.

Although these funds were much cheaper than actively managed alternatives, they weren't the bargains they later became. The annual expense ratio for the Schwab fund was around 0.50%, and the Fidelity Spartan option cost 0.35% per year. The two Vanguard funds were less costly, but even that was not easy for investors to know because as funds of funds they published an expense ratio of zero. You had to dig a little to learn the combined cost of the underlying funds.

Meanwhile, investors looking for an index fund that owned both U.S. and foreign stocks--a global fund--were out of luck

Things have changed on all three fronts. The number of alternatives for broad foreign index investing has exploded in the past few years. Global index funds now exist. Finally, in many cases the cost of these funds has dropped sharply.

Overall, these developments can be seen as positive. Investors can choose from many more international index funds, providing a broader diversity of approaches, and in some cases for substantially less money. But investors must be careful, too; narrowly focused choices can raise the risk level, and not all of the new entrants are bargains.

Vanguard Expands Its Lineup
Instead of sticking exclusively with MSCI indexes when choosing its benchmarks for its broad funds--as well as regional offerings like Vanguard Pacific Stock Index VPACX--Vanguard branched out from 2007 to 2009. Vanguard officials said that some advisors preferred indexes from another provider, FTSE. So, you can now select Vanguard FTSE All-World ex-US Index VFWIX for broad foreign exposure. In addition, investors can target small stocks with Vanguard FTSE All-World ex-US Small Cap Index VFSVX. The latter is the first foreign small-cap index fund of any kind from Vanguard.

In addition, for indexing fans who'd rather buy just one fund to cover both the U.S. and foreign stocks, Vanguard created Vanguard Total World Stock Index VTWSX (which also follows a FTSE benchmark).

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