Why This Vanguard International Index Fund Is Highly Rated

Key Morningstar Metrics for Vanguard FTSE Developed Market Index

• Morningstar Medalist Rating: Silver
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: High

The market-cap-weighted Vanguard FTSE Developed Markets Index VTMGX fund’s low fee and broad diversification make it one of the more appealing international stock funds available.

The fund tracks the FTSE Developed All Cap ex US Index. It targets small-, mid-, and large-cap stocks from international developed markets, pulling in around 4,000 names. That is nearly all stocks in the developed international market. The fund weights its holdings by market capitalization, which is an efficient way to size holdings because it harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow take up a larger share of the fund, while shrinking companies that may be struggling become smaller holdings.

Diversification is a strength of this fund. Unlike many competitors, it includes stocks from Canada and South Korea. The fund holds more than 4,000 stocks, with its 10 largest positions accounting for just 11% of assets. No one position accounts for more than 1.5% of the fund’s assets. Some of this fund’s largest holdings are European multinationals like Nestle, Shell, and LVMH Moët Hennessy Louis Vuitton.

The fund lacks emerging-markets exposure, though. Developing markets constitute less than 10% of its foreign large-blend Morningstar Category competitors’ portfolios; still, this fund won’t reap the full rewards of an emerging-markets rally. The omission hasn’t hurt the fund in recent years, though, as emerging-markets stocks have struggled.

Low fees also have helped the fund perform well relative to its category. In the 10 years through September 2023, this fund’s cheapest share class beat its average peer by 75 basis points annually. The fund was more volatile, but that didn’t hurt its risk-adjusted returns versus the category average.

Vanguard FTSE Developed Markets Index: Performance Highlights

For the 10 years through September 2023, the fund’s cheapest share class gained 4.03% annualized, 75 basis points better than the category average. Low fees give the fund a durable advantage, but its country and regional allocations can drive category-relative performance from time to time. For example, the fund’s big helping of Japanese stocks hurt performance in 2021 and 2022 but has helped it so far in 2023. This fund does not hedge currency risk, which has mostly hampered performance since the U.S. dollar has been stronger than the foreign currencies represented in this fund. Over the long run, however, the impact of foreign-exchange rates on performance tends to wash out.