What is VXUS? (Pros, Cons, and Strategies)

Expanding your portfolio beyond the U.S. market can provide diversification and exposure to growing international economies. VXUS, Vanguard Total International Stock ETF, is a popular choice for such a strategy. In this blog post, we will explore what VXUS is, its advantages and disadvantages, and some effective strategies for investing in it.

What is VXUS?

VXUS stands for Vanguard Total International Stock ETF. It is designed to give investors exposure to a wide range of international markets, excluding the United States.

VXUS tracks the FTSE Global All Cap ex US Index, which covers the large-, mid-, and small-cap segments of developed and emerging markets outside the U.S. This comprehensive approach allows VXUS to provide broad international exposure, making it a valuable component in a diversified portfolio.

Key Features of VXUS

• Covers over 7,000 stocks from around the globe except the U.S.
• Includes both developed markets (such as Japan, the U.K., and Canada) and emerging markets (such as China, India, and Brazil)
• Represents various sectors and industries

The broad coverage of VXUS means that it includes a diverse range of companies, which helps to mitigate risk by not relying on a single country's economy or sector.

VXUS Composition

VXUS includes a mix of large, mid, and small-cap companies from multiple countries and industries. Some of its largest holdings are in companies like Taiwan Semiconductor Manufacturing (TSM), Nestle (NESN), and Samsung Electronics (005930.KS). This wide reach means investors are exposed to various economic conditions and market cycles across the globe.

Pros of VXUS

Broad Diversification

VXUS offers exposure to a vast array of international stocks, which is beneficial for diversification. This can reduce the volatility of your portfolio as it is not tied to the economic performance of a single country. By investing in VXUS, you can benefit from the growth potential of various global markets.

Low Expense Ratio

Similar to other Vanguard ETFs, VXUS has a relatively low expense ratio of 0.07%. This is important for long-term investors as lower costs can significantly enhance net returns over time.

Access to Emerging Markets

VXUS provides access to emerging markets, which can often offer higher growth potential than developed markets. Countries like China and India have been experiencing rapid economic growth, and VXUS allows investors to tap into these opportunities.

Cons of VXUS

Currency Risk

Investing in international stocks exposes you to currency risk. Fluctuations in exchange rates can affect the returns on your investment. If the U.S. dollar strengthens against other currencies, it can reduce the returns generated from foreign investments when converted back to dollars.

Less Familiar Stocks

For many U.S.-based investors, the companies included in VXUS may be less familiar. This can make it more challenging to understand the risks and opportunities associated with these investments compared to domestic stocks.

Economic and Political Risks

International investments come with additional economic and political risks. Changes in political regimes, economic instability, and differing regulations in various countries can impact the performance of VXUS.

VXUS Investment Strategies

Long-term Investment Strategy

Given its broad international exposure, VXUS is best suited for long-term investors seeking diversification. Holding VXUS for an extended period allows you to benefit from global economic growth and smooth out short-term market volatility.

Combine with Domestic ETFs

A common strategy is to combine VXUS with a U.S. equity ETF, such as VTI (Vanguard Total Stock Market ETF), to create a well-rounded global portfolio. This ensures you have exposure to both domestic and international markets.

Dollar-cost Averaging (DCA)

By investing a fixed amount of money in VXUS at regular intervals, you can mitigate the impact of market volatility. Dollar-cost averaging helps in lowering the average cost per share over time, making it a prudent strategy for long-term investments.

Conclusion

VXUS is an excellent option for investors looking to diversify their portfolios internationally. With its broad exposure to global markets, low expense ratio, and access to emerging economies, it stands out as a robust international fund. Despite some risks like currency fluctuations and political instability, strategic investing in VXUS, particularly over the long term, can yield substantial benefits.

By understanding the pros and cons and implementing effective strategies, you can leverage VXUS to achieve a diversified and resilient investment portfolio.