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Summary The ETF has an excellent expense ratio. Investors need to remember the importance of international diversification even as domestic equity as thoroughly outperformed during the latest bull market. The ETF is highly diversified through over 2500 individual holdings. The sector allocations are very similar to the benchmark and to the category average. Peers with similar allocations and higher expenses are facing a tough battle. The Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ) is a very solid international ETF. During the recession several years ago it took a pretty harsh beating but the value that was lost has been recovered since. International funds generally have been thoroughly smashed by domestic equity since the recession, but investors would be wise to remember the importance of some international allocations. Expenses The expense ratio is a .14%. Vanguard regularly sets the bar for creating low fee investment vehicles for investors to gain solid diversification with low costs. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: While these companies are international, some do have some fairly material direct exposure to the United States. Toyota Motor Corp (NYSE: TM ) certainly has a substantial presence in the United States and despite the problems the company has seen they have plenty of room to grow. As an analyst, it is rare to turn off the finance side of my brain. When I was visiting the local dealership for Toyota, there were a few things that stood out. To be clear, I believe that Toyota makes an excellent product. I believe their manufacturing practices are excellent. However, I believe their customer service strategy has been a severe handicap. This is important to the future performance of Toyota Motors because their ability to bring customers in on the service side of the business is dependent upon having satisfied customers. I fall into their target demographics. I’m a huge fan of their product line and have no intent to own any other brand of car for at least the next couple of decades. I put together a much more complete assessment of the weaknesses and potential fixes for their customer service flaws. Sectors (click to enlarge) You may notice an interesting thing in the sector allocations. The bench mark weightings, VEU’s weightings, and the category average weightings are generally fairly tight for any sector. There are quite a few funds where Vanguard is sticking to an index in a way that peers are not and the result is a material difference in the allocation weights. The reason this is material is because VEU has such a low expense ratio relative to other international ETFs. If Vanguard is going toe to toe with another fund manager that offers very similar sector exposures and a much higher expense ratio, then VEU has a huge advantage. For the other ETF to win, the opposing fund manager will have to manage the portfolio to have significantly better performance within the same sectors by regularly delivering superior analysis of the individual companies in the sectors. Some investors believe that will regularly happen, I believe it is more likely to reflect sample sizes than incredible skill levels. When the allocations are going to be very similar, I believe the low cost leader has huge advantage and will win over the long term most of the time. Region This is a fairly steady allocation with emerging markets being weighted at 17.7% of the portfolio. Europe gets a fairly huge weighting, so I wouldn’t combine this ETF with other international ETFs that are going heavy on Europe. Instead, I would simply cross off the other ETF and look for one that created a better match for VEU. Who wants to give up a low expense ratio on a fund with over 2500 individual holdings? If you want diversification, this is it. It makes more sense to drop other competing allocations. If investors feel more aggressive, they may want to consider adding on to the emerging markets exposure here. For the investors that want to make their portfolio more conservative, they might stick to using VEU for their entire international equity position. On the other hand, if they still find that using this for 10% to 15% of the portfolio is too dangerous, they may want to simply reduce the allocation in favor of short duration high quality bonds. Conclusion This is a great international ETF. It offers investors thoroughly diversified exposure and extremely low expense ratios. Even for investors that choose not to use VEU, it is very hard to make an argument against including it in any discussion for “best of breed” status among international ETFs. Scalper1 News
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