Vanguard Developed Markets Index Fund Institutional Shares VTMNX

Vanguard FTSE Developed Markets Index’s market-cap-weighted portfolio holds nearly all stocks from the developed international market. Its low fee and expansive portfolio make it one of the more appealing international stock funds available.

The fund tracks the FTSE Developed ex US All Cap Index. It targets small-, mid-, and large-cap stocks from international developed markets, pulling in almost 4,000 names. The final portfolio weights its holdings by market capitalization. Market-cap weighting efficiently sizes holdings by harnessing the market's consensus opinion of each stock's relative value. Stocks that grow faster than peers take up a larger share of the portfolio, while struggling companies will have less importance.

Diversification is a strength of this portfolio, owing to its expansive target index. Unlike many competitors, it includes stocks from Canada and South Korea, improving its breadth. The fund holds almost 4,000 stocks, with its 10 largest positions regularly accounting for around 10% of assets. No one position accounts for more than 2% of the allocation. Some of this fund’s largest holdings are European multinationals with diversified revenue streams and robust competitive advantages.

Emerging-market stocks are a narrow part of the investment universe that this fund misses. While emerging-market stocks usually constitute just a tenth of competitor portfolios, this fund is not positioned to reap the rewards should they perform well. However, substandard performance in that segment gave this fund a leg up on competitors in recent years.

The Exchange-traded fund share class returned 11.4% annualized for the five years through September 2025, similar to other developed-market index funds but 1.2 percentage points better than the Morningstar Category average. Its volatility tends to be slightly elevated for this index, but risk-adjusted returns still measure up well.

The fund captures nearly all the overseas developed markets while effectively keeping a lid on turnover. It earns an Above Average Process Pillar rating.

The fund tracks the FTSE Developed ex US All Cap Index. Constituents must pass several screens to be included in the portfolio. This benchmark first sorts all companies from 24 overseas developed markets by their free-float-adjusted market capitalization. Then it targets firms that land in the top 98% of this group, with a buffer around that threshold to mitigate unnecessary turnover. Annual turnover for the fund consistently measures around 5%, a fraction of the typical peer’s average annual turnover. High turnover can raise transaction costs that take a bite out of returns.

Additional liquidity screens ensure the investability of the index’s holdings, making it easier to track. The index weights the final list of nearly 4,000 stocks by market cap, an efficient method that fosters low turnover. The portfolio reconstitutes semiannually in March and September.

Omitting stocks from emerging markets results in country- and regional-allocation discrepancies relative to the category average. The fund fills the void with larger allocations to Asian and North American markets relative to the category average, namely, Japan, South Korea, and Canada.

South Korea and Canada together represent more than 15% of the portfolio, more than double the allocation of most peers. It’s notable because both countries are largely absent from competitors’ portfolios. Several benchmarks in the category exclude North American and South Korean stocks, labeling the latter as an emerging market. Samsung Electronics, South Korea’s largest public company, is consistently one of the fund’s largest holdings.

Sector weightings look comparable to the category, despite some regional differences. No sector weightings significantly deviate from the category average. A 24% allocation to financials stocks is the highest of any sector, but industrials are close behind. Both allocations are nearly identical to the category average. Despite their prominence, industrials or financial services companies rarely rank among the fund’s top 10 holdings. Healthcare and technology firms tend to receive the highest weighting in this portfolio.

Vanguard's equity index group earns an Above Average People Pillar for its well-supported and stable management team adept at leveraging Vanguard's comprehensive resources. Its portfolio managers benefit from the firm's global infrastructure and advanced portfolio management technology, which facilitates cost-efficient trading around the globe. The infrequent turnover of managers, coupled with Vanguard's practice of rotating them across various funds, enhances their expertise and understanding of different market segments.

The fund's managers directly handle trading, providing them with deeper insights into the portfolio's operations than a stand-alone trader might have. They are backed by a global team of dedicated personnel and employ sophisticated, scalable technology to minimize their workload and enhance tracking accuracy. Vanguard's independent risk-management team plays a crucial role in ensuring its funds adhere to predetermined tracking tolerances. It collaborates closely with the managers to oversee trades and address potential issues proactively. Vanguard compensates managers based on tracking error and excess return metrics to foster a culture of accountability and ensure that the management team's interests are closely tied to investors'.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

The ETF share class gained 8.6% annualized over the 10 years through September 2025, a return similar to other prominent foreign-stock indexes and better than the category norm. Its exclusion of emerging-market stocks limits its scope relative to broader benchmarks and contributes to short-term return discrepancies, but those differences equated to little over the past decade. Volatility tends to run slightly hotter than some benchmarks, but differences are minor.

The index’s focus on developed market stocks drives most risk and return differences compared with more expansive peers. That’s not guaranteed to continue because those differences have mostly washed out in the long term. Emerging-market stocks underperformed their larger and developed-market peers by a considerable margin from 2021 through 2023. This was likely attributable in part to rising and then high global interest rates, as emerging markets tend to be more sensitive to interest rate changes. Forces affecting different sections of the global market will continue to drive relative performance, but the fund is fully invested and charges one of the lowest fees in the category. Investors should expect it to capture more of the market’s long-term upside than many of its competitors.

This fund does not hedge currency risk. This has mostly hampered performance since the US dollar has been stronger than the foreign currencies represented in this portfolio. However, the advantages and disadvantages of currency hedging come in waves. Over the long run, the impact of foreign-exchange rates on total return tends to wash out.

Vanguard Developed Markets Index Instl's Prospectus Adjusted Expense Ratio is 0.03% per year. It places it in the cheapest quintile of the Morningstar US Fund Foreign Large Blend Category, where the median fee is 0.82% per year. This cost positioning translates into a Medalist Rating Price Score of 2.41, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.