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Don't Let the Star Rating Fool You--This Fund Is Gold

Patricia Oey

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Patty Oey: Vanguard Total International Stock is a solid option for your international-equity allocation. Its expense ratio is 14 basis points, and this is significantly cheaper than its peers, which includes actively managed funds. The median fee for category is 111 basis points.

This is your basic cap-weighted index fund. It has about 5,000 securities, so it provides very broad coverage. It holds large-, mid- and small-cap firms. It holds both developed-markets and emerging-markets companies, and investors should know that actually relative to its category it has a high emerging-markets allocation. It's at about 14%; the category average is at 6%.

With its rock-bottom fees, this is a great holding to build your international-equity allocation. You can hold this fund, and then to customize your exposure, you can hold some actively managed funds, some regional index funds, and some exchange-traded funds.

Some investors may wonder why this fund has a Gold [Morningstar Analyst Rating for Funds], while at the same time it's only a 2-star fund. And the reason for this is, the Morningstar Analyst Rating is forward-looking, and our Gold rating is based on our opinion that because of [the fund's] very, very low fees, over the long term, its performance should be better than the category average.

The star rating, on the other hand, is strictly historical, and it's not an opinion. It's just the risk-adjusted returns relative to [the fund's] category. This fund, the Admiral share class, is actually quite young; it only incepted in November 2010. And since then emerging markets have actually underperformed, and as we mentioned before, this fund relative to its category has an overweight in emerging markets.

Generally speaking, when emerging markets underperform, we would expect this fund to underperform over the short term and then likewise when it outperforms, it's likely to outperform over the short term. But these relative regional differences, they tend to become more muted over the long term.