The lowest-cost option in terms of expense ratio has been the combination of VTS (US Total Market) and VEU (All-World ex-US). But this requires investment in multiple funds, and these funds are cross-listed US funds which can make VEU, in particular, less tax-efficient.
The alternative was an all-in-one international ETF such as WXOZ (World ex Australia) or IOO (Global Top 100). Unfortunately both of these come at a higher cost (around 0.4% p.a.) and are less diversified in their holdings. IOO is also a US-listed fund.
Vanguard have now made their International Shares Index Fund (excluding Australia) available as an ETF. This comes with a low expense ratio of 0.18% p.a. (0.21% p.a. for a currency hedged version), around half the price of competing ETFs.
| ETF | Code |
|---|---|
| Vanguard® MSCI Index International Shares ETF | VGS |
| Vanguard® MSCI Index International Shares (Hedged) ETF | VGAD |
The underlying International Shares Index Funds have been running since 1997 with a strong record of tracking (or even exceeding) their index. The funds track an index of over 1,500 stocks across 22 developed countries.
Liquidity of the ETF is not great, with spreads around the 0.25-0.3% mark. However this is already comparable to WXOZ and also to the buy-sell spread of the underlying index fund.
Overall this is great value. It may not suit everyone; for example, some may prefer separate allocations to the US and other countries, and it does not include Emerging Markets or Small Cap stocks. But I view it on balance as the lowest-cost product overall in the market for international shares available today, so much so that I'll be editing my most recent post to include VGS.
Links:
Vanguard Exchange Traded Funds
MSCI World ex Australia Index
That's really great. How does it compare to just having a mix of VTS and VEU though?
ReplyDeleteAt the moment my target for World ex-Australia shares (not including extra allocation to emerging markets etc) consists of about 44% VTS and 56% VEU (ratio decided by looking at latest market cap of US stock market compared with total of all markets). This results in an expense ratio of just under 0.11%. Would there be any benefit of moving to VGS instead?
I should add; I realise that VEU contains some Australian stocks (5.7%) but they are fairly negligible in the grand scheme of things given that I already have a good amount of VAS. I could compensate by holding less VAS if I were especially concerned about this.
DeleteMy target is 50% Australian stocks, 35% general international, and 15% other (e.g. extra weighting for emerging markets). This means with my current target, 5.7% of 56% of 35% comes out to an extra 1% or so; not something I am concerned about.
The headline Expense Ratio of VTS+VEU is indeed lower. You also get Emerging Markets with that combination, bonus diversification! Putting aside small transaction costs and hassle of having an extra fund I suspect it still roughly breaks even as VEU has additional tax withholding cost.
ReplyDeleteAs VEU is US-domiciled when it collects dividends from, for instance, Germany the German authorities will apply withholding taxes on dividends (in their case around 15%). The US Government then withholds their layer of withholding taxes (15% if covered under the tax treaty with a W-8BEN form). That second layer can potentially be used as a tax credit by Australians, the German withholding (and even Australian withholding on unfranked dividends) cannot. So we get a taxation drag that, as a rough guesstimate, is of similar size to the difference in expense ratios.
If you're already in VTS and VEU there will likely be capital gains tax implications to switching, as well as transaction costs. I wouldn't do it myself except in a down-period when I could tax-loss harvest but it depends on your individual allocation preferences and tax situation. VGS is, however, great for people starting fresh or for people who don't want to manage separate US and ex-US components.
That's a good point about withholding tax. Is there an easy way to find out how much withholding tax is affected with VEU?
DeleteI will probably keep my VTS+VEU, but may look into buying VGS for additional share parcels.
I seem to recall withholding for VEU has historically been ~7% but can't find where that figure is from.
DeleteIf it were 7% on say a 3% distribution that is about 21b.p. for VEU. If VEU is, say, 40% of international then we're looking at ~8 or 9 b.p. for VEU+VTS aggregate drag relative to VGS.
Thanks I hadn't seen this development as yet. Great news. I think I will keep my existing VTS/VEU but for new ETF investment will opt for VGS. And will probably also make use of the VGAD option too! Adrian
ReplyDeleteGlad to help inform!
DeleteWith VGAD, if you use SunSuper I'd keep my hedged international equities in Super (and have more unhedged outside Super if required). This reduces transaction costs but also, more importantly, hedging throws off income which is taxable at regular income tax rates. That can end up relatively expensive outside of Super.
Hey, just thanking you so much for putting this site up.
ReplyDeleteIt's given me quite a firm grip on whats to offer in Australia regarding Super funds, which is a rather overwhelming ordeal when you first walk into it.
- Reece
Hi SF,
ReplyDeleteThanks for the blog! Investment and retirement/super information focused on Australia is pretty sparse on the Internet so thanks for sharing. Your "Everything you need to know about financial planning (Australian Edition)" posts are particularly awesome. I am glad I managed to find your blog through your useful posts on Whirlpool.
I was wondering if maybe your email form is broken or if you are just swamped with emails as I did not get a reply?
Keep up the great work,
Shaz
(AKA Shaz_Au @ MMM Forum)
Are more refundable franked dividend tax credits available with VGS compared to VTS/VEU for low income earners?
ReplyDeleteHi Michael. I'm not a tax expert.
DeleteIn managing my own affairs I don't think either VGS nor VTS/VEU have refundable tax credits or franked dividends - the income is from a foreign source and I've only used it as an 'offset' in item 20 on the supplementary section of my tax return. Best to check with an accountant.