VXUS vs. VEU - Which Is Better?

VXUS vs. VEU – Which Is Better?

Since I have come across the infamous three-fund portfolio strategy for financial independence, I have wondered if VXUS is really better than VEU. Both funds seem to accomplish more or less the same thing, yet have some subtle differences.

So, which is better? Both international funds provide a very similar overall return. The main difference between VXUS vs. VEU is the number of holdings and the regional allocation of assets. Furthermore, VXUS is a lot younger than VEU so there is less historical data available to compare past performance.

Nonetheless, both of these funds provide excellent exposure to the international non-US market so they are worth having a closer look at:

VXUS vs. VEU – Overview

We’ll take a look at some of the differences and similarities between VXUS and VEU in this article. After the initial comparison of key facts, we’ll dive a bit deeper into some risk analysis and finish off with a back-tested portfolio of $10,000.

This way we will not only see what the differences are but also how they actually affect the funds’ performance.

What’s The Difference?

VXUSVEU
NameVanguard Total International Stock ETFVanguard FTSE All-World ex-US ETF
IndexMSCI All Country World ex USA Investable Market IndexFTSE All-World ex US Index
Expense Ratio0.08%0.08%
IssuerVanguardVanguard
StructureETFETF
Inception Date1/26/20113/8/2007
AUM$17.5B$21.3B
Holdings7,4683,429

Index

The Vanguard Total International Stock ETFs (VXUS) tracks the MSCI All Country World ex USA Investable Market Index. This index aims to give investors broad exposure to the global stock market by replicating its performance by including more than 7,000(!) companies from around the world.

The Vanguard FTSE All-World ex-US ETF (VEU) tracks the FTSE All-World ex US Index. This is index has the exact same goal the one above: mirroring the performance of the international stock markets. However, this index only includes around 3,400 companies.

In comparing these two indices, the biggest difference has already become obvious: the number of holdings. In general, the index or fund with a larger amount of holdings will be a truer representation of the world’s economic activity than the smaller one.

Expense Ratio

VXUS and VEU both have an expense ratio of 0.08% which is extremely cheap for broad international exposure funds. Given all the additional administrative tasks that come with dealing with global stock market exchanges, the fees are excellent. This means you would pay about $8 in fees for every $10,000 invested with either fund annually.

Vanguard has recently lowered this from previously 0.09%, another testament to Vanguard’s efforts to provide the very best financial products to us retail investors.

Issuer

VXUS and VEU are both issued by Vanguard.

There are some unique aspects about Vanguard which make them an excellent choice for long-term investors. For one, they essentially operate at cost and redistribute all profits made from managing the funds back into the funds.

Another compelling advantage of Vanguard is that there are no third-party investors involved who own the company. The company is collectively owned by its investors. You and me.

Number of Holdings

VXUS has some $17.5B assets under management putting it among the top 50 largest ETFs worldwide. As mentioned before it holds close to 7,500 securities of companies from around the world.

On the other hand, VEU manages just over $20B in assets now, holding close to 3,500 securities. Taking into account that VEU is 4 years older, VXUS has been catching up fast. Following the current trend it will likely soon overtake VEU in managed assets.

On of the reasons, VXUS is becoming increasingly popular among investors is the increased number of holdings. Generally speaking, more diversification equates to less risk.

Fund Composition

In this section we’ll take a lot at another distinguishing factor between VXUS and VEU: Equity Market Capitalization. In other words, the weight of small-, mid- and large-cap companies in each fund.

VXUS Capitalization

VXUS Capitalization

Nearly 75% of VXUS’s holdings are large-cap companies. This is followed by 20% in mid-cap stocks and the remaining 5-6% in small-cap companies. The large-cap values are similar to that of the entire U.S. stock market, however, mid-cap companies represent a significantly higher share of the pie.

VEU’s market capitalization looks a bit different:

VEU Capitalization

VEU Capitalization

Here, large-cap stocks make up over 80% of the fund’s holdings. This is closer to something you’d expect out of an S&P 500 fund than a broad market ETF. As you can see from the chart above, small-cap companies are basically non-existent in this fund.

This is one of the biggest caveats of VEU. Small-cap companies are very much underrepresented in VEU.

Regional Allocation

In addition to the differences in market capitalization, there are slight variances in regional allocations of these funds.

VXUS Regional Allocation

VXUS Regional Allocation

Almost one-quarter of VXUS securities are in emerging markets at 23.5%. The biggest allocation, however, remains in Europe at close to 40%, followed by the Asia-Pacific region at 28.9%.

The remaining allocations are distributed among North America, namely Canada and Mexico, Middle Eastern countries and several others.

VEU Regional Allocation

Regional allocation for VEU looks surprisingly similar. European companies play an equally large role in the fund’s composition, followed by the Pacific region and emerging markets.

Overall, both VXUS and VEU provide a solid diversification in global stocks. The weight of each region roughly equates to the sum of GDP of the respective countries.

Industry Exposure

Industry and sector exposure plays a big role in diversification and making sure that you are not overexposed to one specific economic sector. As the economic growth of global industries necessarily deviates from domestic ones, these are some aspects to pay attention to.

VXUS - Industry Exposure

The above chart shows the weight of different sectors for VXUS. What’s striking at first sight is that the tech sector only makes up around 10% of holdings. Comparing this to the distribution domestically we are looking at percentages closer to one-quarter of all companies.

Basic materials also make up a much larger chunk at around 7.5%.

VEU - Industry Exposure

The industries for VEU look unsurprisingly similar: Financial services are in the lead by far and real estate, utilities and energy make up the smallest portion of sectors adding up to only around 10% total.

Even though the may be similar, here is what differs:
1) VXUS is not as exposed to financial services as VEU is.
2) VEU has less exposure to real estate than VXUS.

These differences are not per se good or bad. It depends on the composition of your current portfolio which of these funds you may prefer to add.

VXUS vs. VEU – Analysis

Besides the differences in key facts and sector exposure, some other important metrics to look at are the ones associated with the risk of a drawdown. Here, you’ll find a summary of the most important risk metrics of VXUS and VEU:

MetricVXUSVEU
Volatility (monthly)4.08%4.07%
Volatility (annualized)14.14%14.10%
Downside Deviation (monthly)2.92%2.90%
Max. Drawdown-25.54%-24.27%
US Market Correlation0.840.84

Volatility

Notably, volatility is essentially the same for either fund at around 4% monthly and 14% annually. Curiously, the maximum drawdown for VXUS is slightly higher at -25.54% compared to VEU’s -24.27%.

If we take a look at the drawdowns represented visually, we’ll get a better idea of how this might affect our portfolio on an annual basis.

VXUS vs VEU - Drawdowns

In some instances we can see the blue line representing VXUS peak out of under the red one, presenting VEU. This has happened before in 2014 and 2015 and is notably also occurring within the current market drawdown of 2020.

VXUS vs. VEU – Performance

Of course, as investors out primary goal when picking a fund tends to be the return on investment. Therefore, in this final section of the article I’ll take a look at the annual returns and overall performance of both VXUS and VEU and examine whether the various differences we have explored above actually have an impact on returns.

Annual Returns

The first overview that might shed some light on this question is that of annual returns. In the graph below you’ll see a visual comparison of both funds and their year-to-year performance starting in 2012.

VXUS vs VEU - Annual Growth

Unfortunately, since VXUS was only initiated in late 2011 there is not much more historic data available on this fund’s performance.

However, some conclusions can still be drawn from this: in economic downturns or more volatile years such as 2018 and 2020 VXUS performs significantly worse than VEU.

It further seems like VXUS is then unable to recover the additional losses incurred during downturns in the subsequent market upswing as returns for both funds in economically more stable times seem to equal out.

Portfolio Growth

In order to get a better understanding of what this implicates for your portfolio I have plotted the following chart comparing a hypothetical portfolio growth of $10,000 in either fund.

VXUS vs VEU - Portfolio Growth

And the differences we have discussed above nearly fade into obscurity when it comes to overall performance. It may be the case that at one point in time VXUS is slightly ahead of VEU to the other way around but in the long-term it will not affect your returns.

Conclusion

We have looked at some of the key differences between VXUS and VEU including their exposure to different industries, regional allocations and risk metrics. And what has all of this led to?

VXUS and VEU perform essentially the same.

For you, as a prudent long-term investor, this just means you can worry less about which exact international fund you are going to pick. Follow a simple three-fund portfolio strategy – ideally with a commission-free innovative broker such as M1 Finance – and you should be all set!

Is there anything I have not mentioned? Let me know below!

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