VEA vs. VXUS: A Global ETF Showdown

For global investors, there’s an abundance of Exchange Traded Funds (ETFs) to choose from when navigating the ever-changing markets. While this variety can be advantageous for diversifying strategies, it also presents the challenge of selecting ETFs that will perform well and meet individual investment goals. In this blog post, we’ll explore two popular international ETFs: VEA and VXUS – what they offer in terms of benefits, drawbacks, and differences in their framework – all while keeping a careful eye on pricing models as you look toward making a decision about which one is right for your investment portfolio.

What Is VEA? What Are Its Pros and Cons?

VEA is an exchange-traded fund that invests in companies located in developed markets outside the US. It aims to track the performance of the FTSE Developed All Cap ex-US Index, which covers over 3,800 stocks from 24 developed countries such as Japan, the UK, and Canada. ETFs like VEA provide investors with a simple and cost-effective way to diversify their portfolios across international markets. However, as with any investment, there are potential risks and rewards to consider. Here are some of them: 

Pros:

1. Diversification: The investment strategy of VEA involves buying stocks from companies in developed markets outside the United States. This approach allows investors to gain exposure to a wider range of markets and industries.
2. Low Fees: Investors can retain more of their returns by choosing VEA, which has a lower expense ratio than actively managed funds.
3. Passive Investing: The VEA fund is managed passively, meaning that its goal is to mirror the performance of an index instead of attempting to outperform the market by choosing individual stocks. Passive investing can be a good strategy for achieving long-term market returns.
4. Liquidity: VEA can be bought or sold at any point in the trading day at its current market price, as it is traded on various stock exchanges.

Cons:

1. Foreign Exchange Risk: VEA’s investment in stocks of foreign companies makes it vulnerable to variations in currency exchange rates, which can impact the fund’s returns, primarily in the shorter term.
2. Limited Exposure: VEA only invests in developed markets located outside the United States. As a result, it does not offer exposure to emerging markets or any other types of assets.
3. Market Risk: Like any other investment in the stock market, VEA carries a market risk. The value of the fund’s investments may rise or fall based on market conditions, impacting the worth of an investor’s shares.
4. No Control: As VEA is a passive fund, investors cannot choose which stocks are part of the fund’s portfolio.

What About VXUS? What Is It?

VXUS is the abbreviation for the Vanguard Total International Stock ETF, a type of investment that focuses on buying stocks from companies in markets outside of the United States. This fund attempts to match the results of the FTSE Global All Cap ex-US Index, containing big, medium, and small-cap stocks from both mature and developing markets worldwide.

Investors can use VXUS to spread out their investments and gain access to international financial systems. This investment covers numerous stocks from nations including Canada, China, Japan, and the United Kingdom, among others.

Pros:

1. Diversification: The VXUS investment focuses on buying stocks from companies located in markets outside the US. By doing so, investors can gain exposure to a wider range of markets and industries.
2. Low Fees: Investors can keep more of their returns with VXUS because it has a lower expense ratio than actively managed funds.
3. Passive Investing: Passively managed fund VXUS aims to mimic the performance of an index instead of attempting to outperform the market by actively selecting stocks. This can be a reliable method of achieving market returns in the long run.
4. Emerging Markets Exposure: VXUS invests in stocks from both developed and emerging markets, giving investors exposure to economies that have higher growth potential.
5. Liquidity: You can buy or sell VXUS on stock exchanges at the current market price throughout the trading day.

Cons:

1. Foreign Exchange Risk: Investing in stocks of foreign companies makes VXUS susceptible to changes in currency exchange rates, which can impact the fund’s returns, especially in the short term.
2. Limited Exposure: VXUS focuses solely on investing in international markets. Therefore, it does not offer any exposure to the U.S. stock market or any other asset classes.
3. Market Risk: VXUS is exposed to market risk like any other equity investment. This implies that the fund’s investments may increase or decrease in value based on market conditions, which can impact an investor’s holdings’ value.
4. No Control: Investors cannot choose which stocks are included in the portfolio of VXUS as it is a passive fund.

VEA vs. VXUS – Let’s Compare Them:

Here’s a brief comparison between VEA and VXUS:

1. Investment Objectives: VEA and VXUS have different investment objectives. VEA focuses on investing in stocks of companies in developed markets outside the United States. On the other hand, VXUS invests in stocks that come from both developed and emerging markets.
2. Index Tracking: Both VEA and VXUS aim to follow the performance of their own indexes. VEA follows the FTSE Developed All Cap ex US Index, while VXUS follows the FTSE Global All Cap ex US Index.
3. Geographic Exposure: VEA invests specifically in stocks from 24 developed countries like Japan, Canada, and the United Kingdom. On the other hand, VXUS invests in both developed and emerging markets. You can find stocks from emerging economies like China, Brazil, and South Korea in this fund.
4. Expense Ratio: VEA and VXUS have low expense ratios, but VEA has a slightly lower expense ratio than VXUS.
5. Currency Risk: These funds invest in foreign stocks, making them susceptible to currency fluctuations. VXUS may have a higher risk than the other fund as it includes investments in emerging markets.
6. Investment Risks: VEA and VXUS carry investment risks. However, VXUS could potentially have greater volatility and risk due to its exposure to emerging markets.

In brief, VEA and VXUS are ETFs that enable investors to invest in global markets. VEA focuses on developed markets, excluding the USA, while VXUS covers both developed and emerging markets. Investors must consider their investment goals, risk tolerance, and investment horizon to select between the two.

There You Have It…

To sum up, VEA and VXUS are exchange-traded funds that allow investors to invest in international markets. VEA primarily focuses on developed markets outside the US, while VXUS offers exposure to both developed and emerging markets worldwide. Both funds have a low expense ratio and aim to track their respective indexes, but investors need to consider their investment objectives, risk tolerance, and investment horizon to determine whether to choose VEA or VXUS. The decision between the two funds will depend on the investor’s individual investment goals and risk tolerance.