Close to 20 years ago, Vanguard came out with the Total World Index ETF (VT). Despite the obvious appeal of such a fund, it didn't get a great reception among dedicated low-cost index mutual fund investors.
Part of that was because it was an ETF—not a traditional mutual fund—and most of us back then, like Jack Bogle, viewed these new-fangled ETFs as instruments of financial destruction/speculation (the traditional fund version of this fund didn't show up until 2019).
Part of the problem was the fact that VT showed up in the summer of 2008 and promptly lost half of its share price in the next few months. That made the performance charts look kind of bad for a while.
Another big part was that you could build VT from its components, the Vanguard Total Stock Market Index Fund (VTI) and the Vanguard Total International Stock Market Index Fund (VXUS), at a lower price than buying the already assembled version (VT). It wasn't a dramatically lower price, but it was a lower price. While that gap is smaller now, it still persists. VTI currently charges three basis points, VXUS eight, and VT 10.
Many people also felt it had too much in international stock. Back then, the majority of VT was non-US stock. As US stocks have mostly outperformed over the last 15 years, that is no longer the case. As I write this, VT is 62.9% US stock, so it's less of an issue. But it's still too much for many people who prefer a US tilt in their portfolio.
As the years have gone on, the fund has been somewhat redeemed. The price has come down and simplicity has become more valued, and it eliminates the constant worry about whether you have the right amount of international stocks because you own the “market amount.”
But I still don't invest in VT. Here are the reasons why.
#1 We Don't Value Portfolio Simplicity as Highly as Many
Like target retirement/lifecycle funds (a one-fund solution), VT appeals primarily to those who highly value simplicity in their portfolio. They can eliminate an asset class from their portfolio. Instead of US stocks and international stocks, they just own stocks. But we personally already have four stock asset classes, two bond asset classes, and three real estate asset classes in our portfolio. Obviously, maximal simplicity isn't our primary value in portfolio design.
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#2 We're Cheapskates
The price on VT has come down, but it still costs about five basis points more than the component parts. Expense ratio differences of 5% really don't matter that much, but for a little additional hassle, I get features I want AND a lower price. Why not take it?
#3 We're Control Freaks
Our written investing plan doesn't call for us to own stocks in the world capitalization-weighted prescription. It calls for us to put two-thirds into US stocks and one-third into international stocks. Fifteen years ago, VT had too little US for our taste. If the current US bull run continues, it might soon have too much. But either way, we want to control this, so we're going to by using the individual funds.
#4 We Invest in Taxable
US tax law says that mutual funds with less than 50% of their assets in foreign stocks can't distribute foreign tax credits to their investors. VT now has less than 50% in foreign stocks. By owning the individual funds, we still get the foreign tax credit on our VXUS distributions, but VT owners would not get a credit at all.
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#5 We Tax-Loss Harvest
As the proponents of direct indexing have noted, the more individual securities you own, the more opportunities you are likely to have to tax-loss harvest. Two is definitely better than one in this respect. To make matters worse, there isn't a great tax-loss harvesting companion with which to swap VT. iShares offers URTH, but that doesn't include emerging market stocks like VT. iShares also offers ACWI but at an expense ratio of 0.32%, and it has significantly less emerging markets exposure and much less small cap exposure (only 3,000 stocks instead of 10,000). Invesco's PSRW is cheaper and it has more EM, but it also has fewer stocks and a pretty significant value tilt.
There might be a good option out there I haven't found yet, but it isn't obvious like most tax-loss harvesting partners are.
#6 VT Isn't Widely Available
This doesn't matter for us since both our US and international stocks are now in taxable where we can buy anything, but few 401(k)s, 403(b)s, and 457(b)s offer VT. It just isn't popular like VTI and VXUS. If you can't get it, you can't use it.
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A Reasonable Use for VT
So, when would someone choose to use VT? Well, my daughter did with her first HSA contribution. It's all stock, because she wants to invest aggressively. It's an ETF, so it's available to trade for free at Fidelity, where the HSA is housed. There's no need to maintain a complicated asset allocation since it's just one ETF. It's a tax-protected account, so the loss of the ability to tax-loss harvest and get a foreign tax credit doesn't matter.
Five basis points on $8,300 = $4.15 this year in additional expense ratio. Hard to cry too much about that. She can always change as the account grows with no tax consequences. Simplicity matters a lot right now, and VT is very simple. Others might choose to use it as they start Roth IRAs for themselves or their children.
VT can be a very simple equity ETF solution, but many of us still aren't going to want to use it for the reasons outlined above.
What do you think? Do you use VT? Why or why not? Do you see different advantages or disadvantages of using it?