As you can see in the accompanying table, for every $10 million invested, an investor using Vanguard’s developed markets ETF saves $16,500 and $11,750 using Vanguard’s emerging markets ETF, when compared with the competing iShares ETFs.
Now, look at what a retail investor would pay on a $10,000 international allocation.
These examples assume that the total annual fund operating expenses remain as stated. The results apply whether or not you redeem your investment at the end of the given period. Your actual costs may be higher or lower.
Financial advisors can get a better idea of the true expense of owning ETFs—whether from Vanguard or another provider—using the cost simulator on our website. Using this tool, advisors can determine the true expense of owning an investment product and its effect on your clients’ portfolios based on factors such as expense ratio, trading costs, and bid-ask spreads.
Accounting for taxes
Then there’s the issue of taxes. Capital losses can be considered an asset in a portfolio when other tax liabilities exist. When an investor’s portfolio has realized gains at year-end, a commonly used strategy is to sell investments at losses (where available) to offset some or all of the expected capital gains.
By switching to VEA from EFA, you could create a loss or a gain depending on when you purchased. The same can be said for potentially moving from VWO to EEM. The decision on taxes—on selling one ETF versus another to harvest losses—is highly unique.
The bottom line: By using a combination of Vanguard ETFs for your developed and emerging markets exposure—ETFs that provide you with broad exposure to international markets—you may achieve savings and have the potential to reduce taxes for your clients.
Notes:
Visit www.vanguard.com to obtain a prospectus for Vanguard and non-Vanguard funds offered through Vanguard Brokerage Services. The prospectus contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
All investing is subject to risk, including possible loss of principal. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Diversification does not ensure a profit or protect against a loss. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
Fran Kinniry, CFA, is a principal in Vanguard Investment Strategy Group.