Most investors are familiar with the Vanguard S&P 500 ETF (VOO +1.60%) and the Vanguard Total Stock Market ETF (VTI +1.36%). They're two of the most popular and cheapest ways to access the U.S. equity market.
What they may not know is that there's an equally attractive fund that invests in the entire global equity market. The Vanguard Total World Stock ETF (VT +1.22%) holds roughly 10,000 stocks across roughly 40 countries. For worldwide stock market diversification, it may be just about the only ETF you need.
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Key takeaways
- The Vanguard Total World Stock ETF has a roughly 60/40 mix of U.S. and international equities.
- Its 0.06% expense ratio makes it one of the cheapest ways to access the global stock market.
- International stocks have significantly outperformed the S&P 500 over the past year and a half, demonstrating the clear value of diversification in a portfolio.
- A slowing U.S. economy combined with much more attractive value overseas makes VT's balanced allocation a better bet than the S&P 500.
Why international diversification is still important
For years, the S&P 500 has been the go-to index for diversified equity exposure. The Vanguard Total Stock Market ETF is the fourth largest ETF in the world, but the knock on it has been that small-cap exposure has been a performance drag. The Vanguard Total World Stock ETF has been dinged for its international exposure.
But the exposure is turning into a tailwind. The Total World Stock ETF has beaten the S&P 500 by nearly 3% over the past year due to its international coverage. Concerns about the U.S. economy slowing, the impact of geopolitical risk, and relative overvaluations has shifted attention to the overseas markets for opportunity.
The real advantage of international diversification is that many economies have different sector and cyclical exposures. Tech isn't nearly the dominant industry elsewhere as it is in the United States. That extra balance, which often includes heavier allocations to financials and industrials, can help mitigate risk when tech isn't leading the market higher.
Some of that value is finally being unlocked now. Given how long international stocks have lagged those from the United States, a sustained reversal of that pattern could be ahead.
VT vs. VOO: U.S. equities vs. world equities
| Metric | VT | VOO |
|---|---|---|
| Expense ratio | 0.06% | 0.03% |
| Assets under management (AUM) | $62.4 billion | $817.5 billion |
| Number of holdings | 10,060 | 504 |
| 1-year return | 21.5% | 17.7% |
| 10-year average annual return | 11.5% | 14.2% |
| Dividend yield | 1.7% | 1.2% |
Data source: VT website, VOO website.
The Vanguard Total World Stock ETF offers a lot of the same benefits of the Vanguard S&P 500 ETF and Vanguard Total Stock Market ETF. It offers incredible diversification and a very low expense ratio of 0.06%, typical of other Vanguard ETFs. And it offers exposure to companies and markets that would be far too costly for most individuals to access.
VT is a great core holding for any investor seeking simplicity from a single ETF. Expanding a portfolio beyond just the S&P 500 is likely to become more important to performance in the coming years. This is one of the best ways to get it in an all-in-one portfolio.
