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There is at least one good reason why most investors should consider
investing a portion of
their portfolios in foreign stocks:
 | Foreign stocks have imperfect correlations with domestic stocks,
so including them in a portfolio should improve the
portfolio's risk/return characteristics. |
For more information on investing overseas, see
here.
There are several similar-seeming investment options
available. Which is best?
All of the options discussed here will likely have very similar
performance and any of them will probably get the job done quite well. You
can't go far wrong choosing any of the options listed here. The funds are listed in rough overall
order of preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
| Schwab International Equity ETF (SCHF). E/R: 0.13%.
This ETF tracks the FTSE Developed ex-US Index of large cap stocks in
developed markets outside the US. For more information on ETFs,
see here. We like this fund because it is
more diversified than VDMAX and it should have less tracking error than VEA.
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| Vanguard Developed Markets Index Fund Admiral Shares (VDMAX). E/R: 0.12%. This fund is an MSCI EAFE
Index Fund which invests in large-cap stocks (i.e., largest 80% of market
capitalization in each covered country). This fund charges a
contingent redemption fee of 2% for redemptions within two months of
purchase. This fee is intended to be a disincentive for market timing. It is
paid directly to the fund (i.e., it benefits remaining shareholders).
There is a $10,000 initial minimum purchase requirement.
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| Vanguard Europe Pacific ETF (VEA). E/R: 0.12%. This ETF
is a share class of the Vanguard
Tax-Managed International Fund (VTMGX). It attempts to track the
MSCI EAFE index, while minimizing capital gains distributions. Due to the fund's tax management, this fund is
expected to have more tracking error with the index than most funds. For more information on ETFs,
see here.
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| Vanguard European Index Fund ETF Shares (VGK) PLUS Vanguard Pacific
Index Fund ETF Shares (VPL). E/R: 0.14% each. These ETFs are
share classes of conventional index mutual funds. For more information on ETFs,
see here.
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| Vanguard Developed Markets Index Fund (VDMIX). E/R: 0.22%. This fund is an MSCI EAFE
Index Fund which invests in large-cap stocks (i.e., largest 80% of market
capitalization in each covered country). This fund charges a
contingent redemption fee of 2% for redemptions within two months of
purchase. This fee is intended to be a disincentive for market timing. It is
paid directly to the fund (i.e., it benefits remaining shareholders).
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| DFA Large Cap International Portfolio (DFALX). E/R: 0.30%.
This fund invests in large-cap stocks (i.e., top 80% of market capitalization
in each country) from developed markets outside of North America. This fund’s
target country allocation roughly conforms to the MSCI EAFE index. However,
they don’t necessarily buy stocks with the goal of replicating the index. They
buy stocks using a sampling methodology, but they attempt to weight each stock
according to its market capitalization (like the index does). Their
methodology suggests that their pre-expense returns ought to be similar to
those of the MSCI EAFE Index. They attempt to add value by not having to
slavishly follow the index – thus avoiding certain problems that all true
index funds have regarding reconstitution.
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| Fidelity Spartan International Index Fund (FSIIX). E/R: 0.20%.
This fund tracks the MSCI EAFE Index of non-North America Large Cap stocks.
The fund
charges a short-term redemption fee of 1.0% if you sell shares within 90 days of buying
them. This fee, paid directly to the fund, is intended to discourage
market timing. There is also a lower cost share class available (FSIVX).
It has an expense ratio of 0.17%, but it has a minimum initial investment of
$100,000.
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| PowerShares BLDRS Developed Markets 100 ADR Index Fund (ADRD). E/R:
0.30%. This ETF tracks an index of large developed markets stocks which
happen to have ADRs (American Depositary Receipts) trading on US exchanges.
This fund isn't very well diversified. For more information on
ETFs, see here.
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| SPDR S&P World ex-US ETF (GWL). E/R: 0.34%. This ETF tracks the S&P
Developed ex-US BMI Index of non-US developed market large cap
stocks, including those in Canada (which are left out of the MSCI EAFE index). We see no good reason to buy it in
retirement accounts. For more information on ETFs,
see here.
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| iShares MSCI EAFE Index Fund (EFA). E/R: 0.34%. This
ETF tracks the MSCI EAFE index. We see no good reason to buy it in
retirement accounts. For more information on ETFs,
see here.
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| WisdomTree International LargeCap Dividend Fund (DOL). E/R: 0.48%.
This is an ETF which tracks the WisdomTree International LargeCap Dividend
Index. This index consists of the 300 largest (by market cap) companies
in the WisdomTree WisdomTree Dividend Index of Europe, Far East Asia and
Australasia (the “WisdomTree DIEFA Index”). The index weights the 300
companies by the cash value of their dividend payouts. For more information on ETFs, see here.
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| T.Rowe Price International Equity Index Fund (PIEQX). E/R: 0.5%.
This fund tracks the FTSE Developed Ex. North America Index of large-cap
foreign stocks.
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| PIMCO International StocksPLUS TR Strategy Fund Institutional Shares (PISIX). E/R: 0.85%. This
is an "enhanced" MSCI EAFE Index Fund (a.k.a., a "synthetic" index fund).
It buys MSCI EAFE index derivatives (e.g., futures, swaps, etc.) and invests
the remaining cash in short to intermediate term bonds in an attempt to
outperform the index. While the expense ratio seems steep, keep in mind
that this fund would be immune from foreign tax withholding, which makes its
effective expense ratio lower by about 15% of the current yield, when
comparing to the other funds here.
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| Schwab Fundamental International Large Company Index Fund (SFNVX). E/R: 0.59%.
This fund tracks the FTSE RAFI Developed ex-US 1000 index, a non-cap weighted
index of non-US developed market large cap stocks. The high expense ratio precludes this being a good
choice. Two lower cost share classes are available for higher minimum
dollar amounts, but even those are too expensive, given the less expensive
large cap choices above.
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| Dreyfus Intl Stock Index Fund (DIISX). E/R: 0.6%. This
is an MSCI EAFE Index Fund. For more information, see the Vanguard Developed
Markets Stock Index Fund description above.
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| PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (PXF). E/R: 0.75%.
This fund tracks the FTSE RAFI Developed ex-US 1000 index, a non-cap weighted
index of non-US developed market large cap stocks. The high expense ratio precludes this being a good
choice. For more information on ETFs, see here. |
| Vanguard Europe Pacific ETF (VEA). E/R: 0.12%. This ETF
is a share class of the Vanguard
Tax-Managed International Fund (VTMGX). It attempts to track the
MSCI EAFE index on non-North America Developed Markets Large Cap stocks, while minimizing capital gains distributions. While ETFs tend to be more tax efficient than conventional mutual funds, Vanguard
ETFs are an exception — these ETFs will be merely as tax efficient as
their underlying conventional funds — VTMGX (no
more, no less), but with a lower expense ratio. The existence of an ETF
share class should further help it become even more capital gains tax
efficient. Due to the fund's tax management, this fund is expected to
have more tracking error with the index than most true index funds. For more information on ETFs,
see here.
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| Schwab International Equity ETF (SCHF). E/R: 0.13%. This ETF
tracks the FTSE Developed ex-US Index of large cap stocks in developed markets
outside the US. For more information on ETFs,
see here.
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| Vanguard European Index Fund ETF Shares (VGK) PLUS Vanguard Pacific
Index Fund ETF Shares (VPL). E/R: 0.14% each. These ETFs are
share classes of conventional index mutual funds. For more information on ETFs,
see here. While ETFs tend to be more tax efficient
than conventional mutual funds, Vanguard ETFs are an exception — these ETFs will be merely as tax efficient as
their underlying conventional funds — VEURX and VPACX
(no more, no less), but with a lower expense ratio. The fact that VEURX
and VPACX have ETF share classes should make them somewhat more tax-efficient than
they otherwise would be. Even without the ETF share class, VEURX and
VPACX have
been quite capital gains tax-efficient (no capital gains distributions at all
at least from 2001-2006).
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| Vanguard Tax-Managed International Fund Admiral Shares (VTMGX). E/R: 0.18%.
This fund tracks the MSCI EAFE index while minimizing capital gains
distributions (but not dividends). The existence of an ETF share class
should further help it become even more capital gains tax efficient.
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| Vanguard Developed Markets Index Fund (VDMIX). E/R: 0.22%. This fund is an MSCI EAFE
Index Fund which invests in large-cap stocks (i.e., largest 80% of market
capitalization in each covered country). This fund charges a
contingent redemption fee of 2% for redemptions within two months of
purchase. This fee is intended to be a disincentive for market timing. It is
paid directly to the fund (i.e., it benefits remaining shareholders).
|
| SPDR S&P World ex-US ETF (GWL). E/R: 0.34%. This ETF tracks the S&P
Developed ex-US BMI Index of non-US developed market large cap
stocks, including those in Canada (which are left out of the MSCI EAFE index).
As an ETF, this fund is expected to be more (capital gains) tax-efficient than
the non-ETFs listed here. For more information on ETFs, see here.
|
| iShares MSCI EAFE Index Fund (EFA). E/R: 0.34%. This
ETF tracks the MSCI EAFE index. As an ETF, this fund is expected to be
more (capital gains) tax-efficient than the non-ETFs listed here. For more information on ETFs,
see here.
|
| Fidelity Spartan International Index Fund (FSIIX). E/R: 0.20%.
This fund tracks the MSCI EAFE Index of non-North America Developed Markets Large Cap stocks.
The fund charges a short-term redemption fee of 1.0% if you sell shares within
90 days of buying them. This fee, paid directly to the fund, is intended
to discourage market timing. There is also a lower cost share class
available (FSIVX). It has an expense ratio of 0.17%, but it has a
minimum initial investment of $100,000.
|
| DFA Large Cap International Portfolio (DFALX). E/R: 0.30%.
This fund invests in large-cap stocks (i.e., top 80% of market capitalization
in each country) from developed markets outside of North America. This fund’s
target country allocation roughly conforms to the MSCI EAFE index. However,
they don’t necessarily buy stocks with the goal of replicating the index. It
buys stocks using a sampling methodology, but it attempts to weight each stock
according to its market capitalization (like the index does). This
methodology suggests that the fund's pre-expense returns ought to be similar to
those of the MSCI EAFE Index. The fund attempts to add value by not having to
slavishly follow the index – thus avoiding certain problems that all true
index funds have regarding reconstitution.
|
| PowerShares BLDRS Developed Markets 100 ADR Index Fund (ADRD). E/R:
0.30%. This ETF tracks an index of large developed markets stocks which
happen to have ADRs (American Depositary Receipts) trading on US exchanges.
This fund isn't very well diversified. As an ETF, this fund is expected
to be more (capital gains) tax-efficient than the non-ETFs listed here.
For more information on ETFs, see here.
|
| WisdomTree International LargeCap Dividend Fund (DOL). E/R: 0.48%.
This is an ETF which tracks the WisdomTree International LargeCap Dividend
Index. This index consists of the 300 largest (by market cap) companies
in the WisdomTree Dividend Index of Europe, Far East Asia and Australasia (the
“WisdomTree DIEFA Index”). The index weights the 300 companies by the
cash value of their dividend payouts. As an ETF, this fund is expected
to be more (capital gains) tax-efficient than the non-ETFs listed here.
For more information on ETFs, see here.
|
| T.Rowe Price International Equity Index Fund (PIEQX). E/R: 0.5%.
This fund tracks the FTSE Developed Ex. North America Index of large-cap
foreign stocks.
|
| Schwab Fundamental International Large Company Index Fund (SFNVX). E/R: 0.59%.
This fund tracks the FTSE RAFI Developed ex-US 1000 index, a non-cap weighted
index of non-US developed market large cap stocks. The high expense ratio precludes this being a good
choice. Two lower cost share classes are available for higher minimum
dollar amounts, but even those are too expensive, given the less expensive
large cap choices above.
|
| Dreyfus Intl Stock Index Fund (DIISX). E/R: 0.6%. This
is an MSCI EAFE Index Fund. For more information, see the Vanguard Developed
Markets Stock Index Fund description above.
|
| PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (PXF). E/R: 0.75%.
This fund tracks the FTSE RAFI Developed ex-US 1000 index, a non-cap weighted
index of non-US developed market large cap stocks. The high expense ratio precludes this being a good
choice. As an ETF, this fund is expected to be more (capital gains)
tax-efficient than the non-ETFs listed here. For more information on
ETFs, see here. |
This web page contains the current opinions of Eric E. Haas at the time it is
written — and such opinions are subject to change
without notice. This web page is for educational purposes only —
we believe the information provided here to be useful and accurate at the time
it is written.
Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here.
Before investing, it is important to consult each prospective investment's
prospectus and consider both its risk/return characteristics and its effect on
your overall portfolio.
This information is not intended to be a
substitute for specific individualized tax, legal, or investment planning
advice. Where specific advice is necessary or appropriate, Altruist
recommends consultation with a qualified tax adviser, CPA, financial planner, or
investment adviser. If you would like to discuss the rationale or support
for any particular idea expressed on this web page, feel free to
contact us.
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