Investors who strive for a simple, straightforward investment strategy often find their way to total market index funds. They are an inexpensive, simple way to craft a diversified portfolio. Three of the most notable of total market funds are Vanguard Total World Stock Index Fund ETF (VT), Vanguard Total US Stock Market Index Fund ETF (VTI), and Vanguard Total International Stock Index Fund ETF (VXUS).

Here is how their basic fund information compares:

Ticker	Expense Ratio	Holdings	Percent U.S. Stocks	Percent Foreign Stocks
VT	0.07%	9,749	61%	39%
VTI	0.03%	3,710	100%	0%
VXUS	0.07%	8,511	0%	100%

 

With VT, you get exposure to foreign stocks and U.S. stocks all in one ETF. Meanwhile, VTI focuses on U.S. stocks only and VXUS focuses on foreign stocks only.

If an investor wanted to invest in a cap weight of all the investable stocks of the world, the investor could purchase just VT or they could craft a portfolio with similar holdings using a combination of VTI and VXUS. Which strategy is better?

This simple example shows how a more complex investment strategy can sometimes bring benefits to your portfolio.

Comparing VTI & VXUS to VT:
Three Benefits of Complexity Over Simplicity

1) Lower Expense Ratio

VT, Vanguard’s World ETF, has the same expense ratio as VXUS, Vanguard’s International ETF. Meanwhile, VTI, the U.S. Market ETF, is 4 basis points cheaper. This means that a blended portfolio of VTI and VXUS has a lower expense ratio than VT alone.

Using VT’s current U.S. and foreign allocations, a similar portfolio made of VTI and VXUS has a weighted expense ratio of 0.0456%. This is 2.44 basis points cheaper than the expense ratio of VT.

This would save you $244 per year on a one million dollar portfolio.

2) Eligible for Foreign Tax Credit

Foreign stock, when held in a taxable account, allows a tax credit of the foreign stock tax paid. Since this is a tax credit, where $1 of credit is worth $1 of savings, the savings can be significant.

However, according to federal statutory tax law IRC Sec. 853(a)(1), only funds comprised of more than 50% foreign investments are eligible for foreign tax credit. Since VT only holds 39% foreign investments, you would pay foreign tax but receive no foreign tax credit. However, because VXUS is 100% foreign, it is eligible for a foreign tax credit.

Dividend payout and foreign tax rate on dividend payouts will both vary each year. With a 3.31% 12-Month Yield and a 2023 foreign tax paid ratio of 6.8% , approximately 0.22508% of the fund value has been eligible as a tax credit. This would be a tax credit of $2,250.80 for a one million dollar portfolio.

Assuming you hold VXUS in a taxable account and owe enough taxes to make use of this credit, this 0.22% credit more than covers the 0.07% fee.

3) Easier Tax Loss Harvesting

While fund managers can use capital losses to offset capital gains within a fund, at best this will simply reduce or eliminate taxable capital gains which are distributed to shareholders. The sales of a fund manager cannot produce tax savings for the investor.

Because of this, an investor owning VT could only harvest capital losses if the fund overall has lost value.

However, an investor owning both VTI and VXUS could take advantage of tax loss harvesting if either U.S. stock or foreign stock is down. They can do this while avoiding wash sales and remaining invested in the market through the use of secondary funds such as SPGM for VT, ITOT for VTI, and IXUS for VXUS.

Conclusion

Vanguard Total World ETF (VT) is an easy way to invest in a cap weight of nearly all the investable stocks of the world. It can easily be thought of as the simplest 100% stock strategy. With VT, you don’t need to manually rebalance to stay aligned with the index, as it is all handled within the ETF.

However, by adding a little complexity and blending a portfolio of VTI and VXUS, you create the opportunity for three layers of benefits.

Photo by Vijayalakshmi Nidugondi on Unsplash. Image has been cropped.