Vanguard to Change International Holdings in Target-Date Funds

Vanguard plans to simplify the construction of its Target Retirement Funds and certain other funds-of-funds by replacing three underlying international portfolios with a single broad international stock index fund.

Assets in the funds’ current international component funds—Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund and Vanguard Emerging Markets Stock Index Fund—will be moved to Vanguard Total International Stock Index Fund. The transition will occur in the coming months in the 12 Vanguard Target Retirement Funds and three Vanguard Managed Payout Funds, according to a press release.  

Under the simplified approach, most of the Target Retirement Funds will comprise three broad index funds: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market II Index Fund, and Vanguard Total International Stock Index Fund.  

Vanguard said the use of Vanguard Total International Stock Index Fund offers better representation of the international equity markets. The fund’s benchmark, which Vanguard recently announced will change to the MSCI All Country World ex USA Investable Market Index (see Vanguard Switches International Fund Benchmark), provides broad coverage of developed and emerging countries across the capitalization spectrum, including international small-cap companies, as well as Canada.   

Vanguard also announced it plans to increase the international equity exposure of Vanguard Target Retirement Funds, Vanguard LifeStrategy Funds, and Vanguard STAR Fund from approximately 20% to approximately 30% of the equity allocations. The exposure to domestic equities in these funds will be commensurately reduced, so that the overall allocation of stocks and bonds remains the same.  

“This increased international allocation will incrementally increase diversification and hence, marginally reduce the volatility of the funds over the long term,” said Vanguard Chief Investment Officer Gus Sauter, who noted that the new weightings will also reduce the “home bias” of the funds.