6 reasons why I should not invest in the Vanguard Total World Index ETF (VT)

About 20 years ago, Vanguard came out with the Total World Index ETF (VT). Despite the obvious appeal of such a fund, it has not been well received by dedicated low-cost mutual fund investors.

Part of that was because it was an ETF—not a regular mutual fund—and most of us at the time, like Jack Bogle, viewed these new ETFs as destructive/speculative tools (a regular fund version of this fund didn’t appear until 2019).

Part of the problem was that VT appeared in the summer of 2008 and quickly lost half of its share price over the next few months. That makes the performance charts look bad for a while.

Another great feature was that you could build a 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 a pre-packaged version (VT). It wasn’t the lowest price, but it was it was low price. Although that gap is smaller now, it still persists. Currently VTI is worth three points, VXUS eight, and VT 10.

Many people also feel that it has too much in international stocks. At that time, most of VT was not US stock. As US stocks have outperformed over the past 15 years, that is no longer the case. As I write this, VT is 62.9% US stock, so less of a problem. But it’s still too much for many people who prefer a US tilt in their portfolios.

Over the years, this bag has been redesigned. The price has come down and the simplicity has become more valuable, and it eliminates the constant worry of whether you have the right amount of international stocks because you own “market value.”

But I haven’t invested in VT. Here are the reasons why.

#1 We Don’t Value Portfolio Simplicity As Much As Many

As targeted retirement/lifecycle funds (a single fund solution), VT appeals primarily to those who value simplicity in their portfolios. They can eliminate an asset class in their portfolio. Instead of US stocks and international stocks, they only have stocks. But we personally already have four asset classes of stocks, two asset classes of bonds, and three asset classes of commodities in our portfolio. Obviously, maximum simplicity is not our main value in portfolio design.

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#2 We are Cheapskates

The price on the VT has come down, but it still costs about five basis points more than the component parts. A 5% average cost difference doesn’t matter much, but with a little added 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 the entire world of money-weighted doctors. It calls for us to put 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 US bull run continues, there could be more. But either way, we want to control this, so we will do it by using each bag.

#4 We Invest in Taxes

US tax law states that mutual funds with less than 50% ownership in foreign stocks cannot distribute foreign tax credits to their investors. VT is now less than 50% in foreign stocks. By being a sole proprietorship, we still receive a foreign tax credit on our VXUS distributions, but VT holders will not receive a credit at all.

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#5 We Tax-Loss Harvest

As proponents of direct indexing have noted, the more securities you hold, the more likely you are to have a tax loss. Two is definitely better than one in this case. To make matters worse, there is no good tax loss harvesting friend to trade VT with. iShares offers URTH, but that doesn’t include emerging market stocks like VT. iShares also offers ACWI but with an expense ratio of 0.32%, and has much less exposure to emerging markets and much less exposure to small caps (only 3,000 stocks instead of 10,000). Invesco’s PSRW is cheap and has a lot of EM, but it also has a few stocks and a good amount of leverage.

There may be a good option out there that I haven’t found yet, but it doesn’t appear to be the case with many tax loss harvesting partners.

#6 VT Rarely Available

This means nothing to us since 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. Not as popular as VTI and VXUS. If you can’t find it, you can’t use it.

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Logical Use of VT

So, when would one choose to use VT? However, my daughter did with her first HSA contribution. It’s all stocks, because you want to invest aggressively. It’s an ETF, so it’s available to trade for free at Fidelity, where the HSA resides. There is no need to maintain a complicated asset allocation as it is just one ETF. It’s a tax-sheltered account, so losing the ability to take a tax loss and get a foreign tax credit doesn’t matter.

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

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

WHAT DO YOU THINK? Do you use VT? Why or why not? Do you see any distinct advantages or disadvantages of using it?