Foreign stocks provide access to a wider opportunity set than those listed in the United States, making them a key building block for constructing a well-diversified portfolio. A comprehensive fund like Vanguard Total International Stock ETF (VXUS) provides an excellent base for building an allocation to non-U.S. stocks. It covers the entire investable market outside of the U.S., giving investors access to stocks of all sizes. The exchange-traded fund's ultralow expense ratio and market-cap-weighted approach curb the cost of ownership, providing it with a significant advantage over its more expensive rivals. It earns a Morningstar Analyst Rating of Gold.
The fund tracks the FTSE Global All Cap ex US Index, which targets stocks of all sizes from more than 40 overseas developed and emerging markets. It weights its holdings by market capitalization, an approach that benefits investors by capturing the market's consensus opinion of each stock's value while mitigating turnover. Markets usually get long-term prices correct, but they occasionally make mistakes. Investors can drive valuations up if they get excited about a particular area of the market, and market-cap-weighting will increase the fund's exposure to it.
Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.