VXUS vs. VTI

VXUS vs. VTI – Which ETF Is Better?

VXUS and VTI are two Vanguard ETFs that are part of the standard 3-Fund-Portfolio and for good reason. Both funds provide excellent exposure to their target markets at a low annual fee. Thanks to their tax efficiency, these two Vanguard funds regularly outperform competitor ETFs with similar aims. But which of these ETFs is actually better? VXUS or VTI?

The main difference between VXUS and VTI is their aim. VXUS is an ETF that gives investors broad exposure to global stock markets, while VTI is focused only on U.S. securities. VXUS has a higher expense-ratio at 0.08% compared to VTI’s 0.03%. In terms of performance, VTI has historically yielded significantly higher returns with a compound annual growth rate of 13.04% than VXUS at 4.72%.

Introduction

In this article, we’ll look at some of the basic differences between VXUS and VTI such as their expense ratio and holding. In the following section, we’ll discuss the funds’ composition, their market capitalization, and industry exposure.

Finally, we’ll compare some risk metrics such as volatility and maximum drawdown as well as both fund’s overall performance and returns.

VXUS vs. VTI – Overview

What’s the difference between VXUS and VTI?

VXUSVTI
NameVanguard Total International Stock ETFVanguard Total Stock Market ETF
IndexMSCI All Country World ex USA Investable Market IndexCRSP US Total Market Index
Expense Ratio0.08%0.03%
IssuerVanguardVanguard
StructureETFETF
Inception Date1/26/20115/31/2001
AUM$20.7B$147B
Holdings7,4553,493

Index

The Vanguard Total International Stock ETFs (VXUS) tracks the MSCI All Country World ex USA Investable Market Index. Included are stocks from international stock markets in Europe, North America – namely Canada and Mexico – as well as the Asia-Pacific region.

The Vanguard Total Stock Market ETF (VTI) tracks the CRSP US Total Market Index. This index aims to replicate the performance of the entire U.S. stock market. At a market correlation of 1.0, it is doing a damn good job at this.

As pointed out previously, the main difference between these funds is their target market. VXUS is aimed at global exposure minus domestic (U.S.) stocks. VTI, on the other hand, is only focused on mirroring the performance of the entire U.S. market.

Expense Ratio

VXUS has an expense ratio of just 0.08% which is extremely low for any international fund. On top of that, Vanguard just recently decreased their fee from 0.09% to 0.08%. Another example of Vanguard actually working for the investor.

VTI has an expense ratio of 0.03%. This is among the lowest on the market. Even though companies like Fidelity offer total market ETFs at 0% fees, they can only do so by promoting them as loss-leaders and making up for this by collecting more fees on their higher-priced products.

Issuer

Both VXUS and VTI are issued by Vanguard.

Vanguard has been my go-to asset management company since day one. Their financial products are top-notch, offering high-quality funds, and very low fees. On the other hand, their brokerage service could make use of some improvement.

Other Differences

At $17.5B of net assets VXUS is one of the biggest international ETFs on the market. These assets are distributed among more than 7,400 securities which are currently held by VXUS.

VTI comprises more than 3,500 securities including large-, mid-, and small-cap companies. It currently ranks number one in total stock market ETFs with almost $150B under management.

VXUS vs. VTI – Fund Composition

Now, we’ll take a closer look at how both of these funds are composed by examining their equity market capitalization.

Equity Market Capitalization

VXUS Capitalization

VXUS

Small-cap companies make up an almost negligible part of less than 7% of assets. Mid-cap stocks, on the contrary, make up a rather large portion of VXUS’s total market cap at 20%. The remaining three-quarters are naturally filled by international large-cap securities.

VTI - Equity Capitalization

VTI

As is the entire U.S. stock market, VTI is made up of over three-quarters of large-cap stocks. Mid-cap companies cannot break through the 20% mark and small-cap stocks only make up a meager 6-7%.

This goes to show perhaps mostly the impact of silicon valley and big tech companies who have substantially added to the large-cap piece of the pie in recent decades.

Regional Allocation

VXUS - Regional Allocation
VXUS – Regional Allocation

VXUS is exposed to Emerging Markets at 23.50%, European markets at 39.80%, and the Asia-Pacific region at 28.90%. The remaining allocations are distributed between the Middle East, North America, and the rest of the world.

VTI‘s only regional allocation is the United States. Obviously.

Industry Exposure

Generally, when adding funds to your portfolio, you want to make sure that you are not over-exposed to one particular industry or asset class.

VXUS - Industry Exposure
VXUS – Industry Exposure

VXUS is dominated by the financial sector whose securities make up close to 20% of total holdings. This is more or less closely followed by Industrials, Healthcare and Consumer Cyclical industries.

On the low end of the spectrum we’ve got Utilities, Real Estate and Energy.

VTI - Industry Exposure
VTI – Industry Exposure

As I have alluded to before, technology is by far the most dominating industry sector of the entire U.S. market and thus of VTI. This is followed by financial services and healthcare in descending order at around 15% exposure.

The least represented sector by market cap is basic materials, energy, and utilities. Real estate actually makes up a healthy 5% of total exposure (REITs included).

VXUS’ exposure is quite similar to that of the domestic U.S. market. However, one big difference is that tech companies make up more than 20% in the U.S. market while they just merely pass 10% internationally.

VXUS vs. VTI – Analysis

The prudent investor may want to look at the monthly and annual volatility and maximum drawdowns the fund has experienced during its lifetime when assessing any fund’s difference and benefits and downsides.

MetricVXUSVTI
Volatility (monthly)4.09%3.86%
Volatility (annualized)14.16%13.35%
Downside Deviation (monthly)2.90%2.50%
Max. Drawdown-25.54%-20.84%
US Market Correlation0.841
VXUS vs. VTI – Risk Metrics

Volatility

VXUS has an annual volatility of 14.16% (4.09% monthly). This value is fairly normal and represents an average of the past decade.

VTI has an annual volatility of 13.35% (3.86% monthly). It might seem counterintuitive that VTI is less volatile than VXUS while also providing a higher return. Generally, we see higher-yielding investments also be more volatile. Additionally, VXUS is also more diversified than VTI and should therefore theoretically be less volatile.

The above fact simply goes to show the strength and stability of the U.S. economy in the past 10 years compared to most other countries worldwide but especially Europe.

It’s worth pointing out here that stock market prices as a whole have become a lot more volatile since the market crash of 2008/2009. This largely has to do with the increase in trading of derivative instruments.

Drawdowns

VXUS vs. VTI - Drawdowns
VXUS vs. VTI – Drawdowns

The above graph visualizes the rather large difference in drawdowns between VXUS and VTI. Especially in the past-economic-boom years of 2015-2017 the difference in drawdowns is enormous.

VXUS, represented by the blue, experienced several drawdowns up to and even exceeding 22.5% while VTI rarely reached those levels in the past.

The most drastic drawdown that VTI experienced is the current Corona-Virus-induced market downturn of 2020. But even here, VTI still is able to feather the blow better than VXUS.

VXUS vs. VTI – Performance

As with every investment, the most significant metrics are likely to be the performance of the asset over time. In this section, we will look at the annual returns for VXUS and VTI, and then perform a back-text of $10,000 if invested at each fund’s initialization.

Annual Returns

VXUS vs. VTI - Annual Returns
VXUS vs. VTI – Annual Returns

The year-end returns for VXUS and VTI from 2012 to 2020 can be seen in the figure above. Unfortunately, since both funds are rather young, we don’t have that much historical data available.

But from the data we have the differences are quite visible. In the past decade, there have been only a couple of years where VXUS actually outperformed VTI, notably in 2012 and 2017. All the other year VTI provided higher year-end returns (or lower losses).

In times of economic decline, this difference is accentuated even more. If we look at the years 2018 and 2020, we see that VXUS lost more than double the value that VTI did.

Portfolio Growth

VXUS vs. VTI - Portfolio Growth
VXUS vs. VTI – Portfolio Growth
PortfolioInitial BalanceFinal BalanceCAGR
VXUS$10,000$14,741 4.72% 
VTI$10,000$28,063 13.04% 
VXUS vs. VTI – Backtest Results

Here I’ve back-tested a hypothetical portfolio of $10,000 allocated 100 percent to VXUS vs. one allocated 100 percent to VTI for the final part of this comparison. And those are the outcome.

A $10,000 investment in VXUS would have resulted in a final balance of $14.741 today. This equates to a compound annual growth rate (CAGR) of 4.72%. Now, this is not bad overall, but you could actually achieve a similar annual return just with a pure bond portfolio.

A $10,000 investment in VTI would have resulted in a final balance of $28,063 today. This equals to a CAGR of 13.04%.

To say that VTI outperformed VXUS in the last years is a understatement. VTI crushed VXUS. VTI’s average annual returns are more than three times higher than VXUS’.

Conclusion

As we have seen, the main difference between VXUS and VTI is their target market. It remains difficult to simply compare the individual funds without taking into account the global economic development.

But both, the funds’ metrics as well as the economic aspects give VTI a significant edge. The fund itself simply has fewer fees. On top of that, the U.S. economy strengthened and grown over the past years far more than the average European or Asian economy.

For us as investors one question, however, remains: how much – if any – of our funds should be allocate to VXUS?

Despite the meandering performance of VXUS I still think it is prudent to allocate a certain percentage of funds to international exposure. After all, the U.S. economy has become a global economy and is so intertwined with Europe, Asia, and South America, that an isolated just does not make sense anymore.

Furthermore, future developments might differ from the past 10 years and Europe’s or Asia’s markets might come back stronger than before. In any case, it seems wise to be prepared for any number of future circumstances.

As investors, we can hedge these risks through diversification. However, whether you ultimately allocate 10, 15, or 20% to international markets remains your personal decision.

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