6 Reasons Why I Don’t Invest in the Vanguard Total World Index ETF (VT) | White coat investor

Nearly twenty years ago, Vanguard introduced the Total World Index ETF (VT). Despite the obvious appeal of such a fund, it was not well received by dedicated investors in low-cost index funds.

Part of that was because it was an ETF – not a traditional mutual fund – and most of us at the time, like Jack Bogle, viewed these newfangled ETFs as tools of financial destruction/speculation (the traditional fund version of this fund didn’t appear until 2019).

Part of the problem was the fact that VT emerged in the summer of 2008 and promptly lost half its stock price in the following months. That made the performance graphs look pretty bad for a while.

Another great part was that you could build VT from its components, the Vanguard Total Stock Market Index Fund (VTI) and the Vanguard Total International Stock Market Index Fund (VXUS), at a lower price than buying the already constructed version (VT). It wasn’t a dramatically lower price, but it was was a lower price. Although that gap is smaller now, it still exists. VTI currently charges three basis points, VXUS eight and VT 10.

Many people also felt that there were too many international stocks in it. At the time, the majority of VT consisted of non-US stocks. Since US stocks have largely outperformed over the past fifteen years, that is no longer the case. As I write this, VT is 62.9% US stocks, so it’s less of an issue. But it’s still too much for many people who prefer a US tilt in their portfolio.

As the years have passed, the fund has been redeemed somewhat. The price has come down and simplicity has become more appreciated, and it eliminates the constant worry of whether you have the right amount of international stock because you own the ‘market amount’.

But I’m still not investing in VT. Here are the reasons why.

#1 We don’t value simplicity as much as many do

Like target pension/life cycle funds (a single-fund solution), VT mainly appeals to people who value simplicity in their portfolio. They can remove an asset class from their portfolio. Instead of US stocks and international stocks, they only own stocks. But personally, we already have four share classes, two bond classes and three real estate classes in our portfolio. Clearly, maximum simplicity is not our primary value when designing portfolios.

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#2 We are Cheapskates

The price of VT has fallen, but it still costs about five basis points more than the parts. Differences in the 5% cost ratio don’t really matter, but for a little extra hassle I get the features I want AND a lower price. Why not take it?

#3 We are control freaks

Our written investment plan does not require us to own shares according to global capitalization weighted regulations. It calls for us to invest two-thirds in US stocks and one-third in international stocks. Fifteen years ago, VT had too little US for our taste. If the current bull run in the US continues, it could soon be too much. But anyway, we want to keep this under control, so we’re going to do that by using the individual funds.

#4 We invest in taxable

U.S. tax law says that mutual funds that have less than 50% of their assets in foreign stocks cannot distribute foreign tax credits to their investors. VT now has less than 50% in foreign shares. By owning the individual funds, we would still get the foreign tax credit on our VXUS distributions, but VT owners would get no credit at all.

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#5 We harvest tax losses

As proponents of direct indexing have noted, the more individual securities you own, the more opportunities you are likely to have to tax your losses. Two is definitely better than one in this regard. To make matters worse, there is no great tax loss harvesting companion you can trade VT with. iShares offers URTH, but that does not apply to emerging market stocks such as VT. iShares also offers ACWI, but at an expense ratio of 0.32%, and has significantly less exposure to emerging markets and much less to small caps (only 3,000 shares instead of 10,000). Invesco’s PSRW is cheaper and has more emerging markets, but also has fewer shares and a fairly significant value shift.

There may be a good option that I haven’t found yet, but it isn’t obvious like most tax loss harvesting partners.

#6 VT is not available everywhere

This doesn’t matter to us as both our US and international stocks are now taxable where we can buy anything, but few 401(k)s, 403(b)s and 457(b)s offer VT. It’s just not popular like VTI and VXUS. If you can’t get it, you can’t use it.

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A fair use for VT

So, when would someone choose to use VT? Well, my daughter did that with her first HSA contribution. They are all stocks, because she wants to invest aggressively. It is an ETF, so it can be traded for free at Fidelity, where the HSA is housed. There is no need to maintain a complicated asset allocation as it is just one ETF. It’s a tax-sheltered account, so the loss of the ability to tax the losses and get a foreign tax credit doesn’t matter.

Five basis points on $8,300 = $4.15 in additional expense ratio this year. Hard to cry too much about that. It can always change as the account grows, without tax consequences. Simplicity is very important right now, and VT is very simple. Others may choose to use it if they start Roth IRAs for themselves or their children.

VT can be a very simple stock ETF solution, but many of us still won’t want to use it for the reasons outlined above.

What do you think? Do you use VT? Why or why not? Do you see different pros or cons of using it?