Bogleheads® on Investing Podcast 051: Christine Franquin, Michael Perre - int'l. stock index funds
00:00:00.000 | [MUSIC PLAYING]
00:00:09.900 | Welcome to Bogleheads on Investing, episode number 51.
00:00:14.120 | This episode is all about international stock investing.
00:00:18.120 | Today, we have two special guests, Christine Franklin
00:00:21.640 | and Michael Perry.
00:00:22.760 | Both are principals and portfolio managers
00:00:25.720 | in the Vanguard Equity Group that
00:00:27.960 | oversees trading and management of the International Equity
00:00:31.520 | Index funds here in the US.
00:00:33.720 | [MUSIC PLAYING]
00:00:43.160 | Hi, everyone.
00:00:43.920 | My name is Rick Ferry, and I'm the host
00:00:45.540 | of Bogleheads on Investing.
00:00:47.280 | This episode, as with all episodes,
00:00:49.480 | is brought to you by the John C. Bogle Center
00:00:51.880 | for Financial Literacy, a 501(c)(3) nonprofit organization
00:00:56.620 | dedicated to helping people make better financial decisions.
00:00:59.840 | Visit our newly designed website at boglecenter.net
00:01:03.600 | to find valuable information and to make
00:01:06.240 | a tax-deductible contribution.
00:01:08.400 | Today, our discussion is all about international investing,
00:01:11.860 | and specifically, investing in international stock index
00:01:16.200 | funds.
00:01:17.140 | We have two special guests, Christine Franklin,
00:01:20.280 | a principal and senior portfolio manager in the Vanguard Equity
00:01:23.440 | Index Group, and Michael Perry, also a principal and portfolio
00:01:27.620 | manager in the Vanguard Equity Index Group.
00:01:30.980 | Christine's background is from trading.
00:01:33.700 | She was the first person hired by Vanguard
00:01:36.700 | to trade in the European markets in Europe.
00:01:40.580 | Michael Perry has been with Vanguard for his entire career
00:01:44.540 | and has moved his way up to a senior position
00:01:47.460 | where he assists not only in the portfolio
00:01:50.020 | management of the index funds, but in the construction
00:01:53.060 | of the indexes themselves.
00:01:54.740 | So with no further ado, let me introduce Christine Franklin
00:01:58.820 | and Michael Perry.
00:02:00.620 | Welcome to the Bogle Heads on Investing podcast.
00:02:03.340 | Thank you for having us.
00:02:04.700 | Thank you.
00:02:05.380 | Well, thank you for being on the show.
00:02:06.960 | We have a lot to discuss today.
00:02:08.780 | We all know that the international equity markets
00:02:11.980 | have not kept pace with the US markets over perhaps 15 years
00:02:17.420 | now, and emerging markets have not really given us
00:02:20.940 | any return here in the United States
00:02:23.300 | for that period of time with the exception of perhaps dividends.
00:02:28.140 | So we're going to talk a lot today
00:02:30.260 | about investing in international stocks.
00:02:34.460 | And I believe it still is a good idea to do this
00:02:38.440 | and why Bogle Heads would want to continue to do this.
00:02:42.380 | Before we get to that point, I do
00:02:44.620 | want to get to know you a little bit.
00:02:46.500 | So Christine, could you just give me a two-minute synopsis
00:02:49.340 | of how you got to the position you're at today?
00:02:52.300 | Sure.
00:02:52.800 | So as you can hear, I'm not exactly raised in the US.
00:02:55.580 | I have a nice French accent.
00:02:56.860 | I'm from Belgium.
00:02:58.420 | I've been at Vanguard about 20 years, so a little bit more
00:03:01.500 | than 20 years.
00:03:02.620 | And I was hired by Vanguard to start the first trading
00:03:05.380 | desk outside of the US.
00:03:07.380 | So when I got hired, I started working in the States
00:03:10.620 | for a year before they shipped me to Europe
00:03:12.660 | to start the first trading desk.
00:03:14.580 | And the idea there was really to help Vanguard
00:03:16.940 | reduce transaction costs by having somebody on the ground
00:03:20.580 | to trade the stocks for the US shareholders.
00:03:24.100 | So I did that for 10 years, created the trading desk
00:03:26.980 | in Europe.
00:03:27.540 | And then about 10 years ago, I was
00:03:29.700 | asked to come to the US where we develop more global presence
00:03:32.940 | and really represent that global view in the US.
00:03:36.560 | And I've been a portfolio manager here for, yeah,
00:03:39.420 | probably 10, 11 years now.
00:03:42.020 | And you have your undergraduate degree
00:03:44.100 | that you received in Belgium.
00:03:45.460 | And you have an MS in finance from Clark University.
00:03:48.580 | And you have a law degree as well.
00:03:50.700 | Yes, I did practice law for three years in Belgium
00:03:53.260 | before I came to the US.
00:03:54.580 | And the main reason I actually came to the US at first
00:03:57.180 | was to improve my English because I
00:03:59.460 | couldn't speak English.
00:04:00.420 | I speak Dutch and French.
00:04:02.260 | And that's when Vanguard found me.
00:04:03.780 | And they gave me the opportunity to do something
00:04:06.740 | I did nothing I could do, which is start to trade and be
00:04:10.220 | a portfolio manager.
00:04:11.140 | So I took the opportunity, came to Malvern 20-some years ago.
00:04:17.500 | I love the team.
00:04:18.260 | I stayed ever since.
00:04:19.700 | So I'm one of the rare person in the trading room
00:04:22.220 | that actually got hired in the trading room.
00:04:24.500 | And I'm still in the same team working
00:04:26.100 | with the same people, which is really a treat and a pleasure.
00:04:29.620 | And Michael, could you tell us something about your background
00:04:32.280 | and how you ended up in the position
00:04:34.140 | that you're in as a portfolio manager?
00:04:36.860 | Vanguard is my first job out of college.
00:04:39.100 | 32 years ago, I started in our fund accounting area
00:04:43.100 | where I learned a lot of how the operations work--
00:04:46.700 | so trade settlements, pricing, cash movements, everything.
00:04:50.980 | And I think the first impression that I had when I started
00:04:54.380 | was the culture.
00:04:56.580 | Definitely, Jack had the culture of doing the right thing
00:05:00.060 | for investors and low cost.
00:05:03.580 | And it kind of struck you when you
00:05:05.380 | went into the copier machine.
00:05:07.820 | There was a little metal box at the top.
00:05:10.340 | And you were expected to put a nickel in the box
00:05:14.500 | if you made personal copies.
00:05:16.400 | And I don't think anyone monitored it,
00:05:18.500 | but it was just a reminder that every penny counted.
00:05:22.500 | Definitely was a focus to keep costs low.
00:05:25.660 | I remember that Jack telling that story.
00:05:28.420 | And others at Vanguard telling that same story.
00:05:30.660 | It's true.
00:05:32.340 | About 25 years ago or so, I got to the trading desk.
00:05:36.620 | And I'd been working on both domestic US funds
00:05:41.220 | and then eventually moved over to work
00:05:43.300 | on our global portfolios.
00:05:45.780 | I've been one of the portfolio managers
00:05:48.940 | on Total International since we went direct investment.
00:05:53.740 | So before it was set up as a fund of funds,
00:05:56.500 | and then we went direct.
00:05:57.500 | So we've been there from the start.
00:05:59.380 | And when was that?
00:06:00.140 | I recall that that all took place.
00:06:02.020 | When was that, that it went from a fund of funds
00:06:04.100 | to a direct investment?
00:06:06.180 | In other words, you bought all the stocks in that fund as--
00:06:09.100 | I would say 15 years ago, because I wasn't receiving
00:06:11.780 | any of my trades.
00:06:13.460 | We had used a couple of different underlying funds.
00:06:16.900 | Europe, Pacific, and Emerging was the underlying.
00:06:20.300 | One of the big things was we're missing Canada
00:06:22.900 | from our Total World Fund.
00:06:24.820 | So we had a pretty good amount of Canada
00:06:26.620 | to buy in that transition.
00:06:29.180 | So it took a bit of planning.
00:06:30.580 | And over the years, we've had a few transitions
00:06:34.980 | like that with multiple funds, where the bottom line is we
00:06:39.860 | try and get into the names as cheaply as possible
00:06:44.060 | with the lowest cost possible.
00:06:47.180 | So trading is definitely a focus for us
00:06:50.020 | in minimizing trading costs and transaction costs.
00:06:53.740 | Vanguard has two Total International funds.
00:06:57.180 | And we'll get into a little bit of the history of that
00:06:59.300 | in a minute.
00:06:59.860 | But before we go down that path, I
00:07:01.240 | want to go to a 30,000-foot level
00:07:04.180 | and look at the world equity market.
00:07:08.940 | And the world equity market is about 60% US stocks
00:07:15.980 | and 40% international from a capitalization-weighted--
00:07:22.180 | not GDP, but capitalization-weighted.
00:07:26.460 | Could you differentiate what makes a US company
00:07:29.980 | and what makes an international company?
00:07:32.380 | Is it just where the headquarters are located?
00:07:34.980 | How is this decided in an index?
00:07:37.340 | So it depends on the index.
00:07:39.300 | They all have their own criteria.
00:07:42.740 | For, say, FTSE and MSCI, they look at a few things.
00:07:47.220 | They look at headquarters.
00:07:49.380 | They look at primary listings.
00:07:53.060 | And then they look at where the companies are incorporated.
00:07:57.220 | So they really take into account several different factors
00:08:00.860 | when they're identifying where the country should be.
00:08:06.180 | Is it safe to say that if you bought a total US stock market
00:08:10.860 | index fund and a Total International index funds
00:08:15.500 | that all of the securities are mutually exclusive,
00:08:20.260 | that there's no overlap?
00:08:21.940 | Because there are two different index providers.
00:08:24.100 | So I couldn't say 100%.
00:08:26.500 | But it's probably somewhere in the 99.9% range.
00:08:31.500 | It's pretty standard where companies are classified.
00:08:35.220 | There might be small differences between the indexes.
00:08:38.300 | But for the most part, you're safe.
00:08:40.420 | There's not any overlap.
00:08:42.860 | So within the foreign market, which
00:08:44.420 | is also called the international market, which is also
00:08:46.740 | called the ex-US market, meaning excluding US,
00:08:50.740 | we've got developed markets and emerging markets.
00:08:56.060 | And how does that get differentiated
00:09:00.940 | among the index providers?
00:09:02.820 | So I'll take that one too, since I'm on the FTSE policy
00:09:06.900 | committee and was on their country classification
00:09:10.140 | committee for probably almost 10 years.
00:09:15.100 | So FTSE has a list of criteria.
00:09:18.460 | It's about 21 criteria.
00:09:20.700 | Some of them are based on economic factors.
00:09:24.420 | There's others that are based on market forces, transaction
00:09:28.220 | costs, liquidity.
00:09:31.380 | There's a bunch of factors.
00:09:33.820 | And if the country meets a certain number of factors,
00:09:37.300 | they get put on a watch list.
00:09:40.020 | And the committees will review the countries on the watch list
00:09:44.460 | and determine whether those countries have
00:09:48.020 | made significant progress in terms of trading.
00:09:52.380 | And the actual committee will make a recommendation
00:09:56.100 | to FTSE in terms of whether it should
00:09:58.980 | be developed or emerging.
00:10:00.740 | The people on that committee are from a few different spots.
00:10:04.140 | So there's buy side.
00:10:05.300 | There's investment companies like us.
00:10:07.540 | There's brokers that are in all over the world that
00:10:10.700 | give their opinions.
00:10:12.100 | There's custodial banks.
00:10:13.820 | So you really have a lot of expertise
00:10:16.020 | that come together on a quarterly basis
00:10:17.940 | to talk about these countries on the watch list.
00:10:21.380 | Now, for the most part, the indexes
00:10:23.220 | are pretty much in agreement with the countries.
00:10:26.700 | There are a few differences, one of which is Korea.
00:10:30.380 | So FTSE has Korea classified as developed.
00:10:34.820 | MSCI has it classified as emerging markets.
00:10:38.220 | It's kind of an interesting one, because economically, I
00:10:41.180 | don't think there's any argument that Korea is developed
00:10:44.620 | from all the metrics.
00:10:46.140 | But certainly, operationally, there's
00:10:47.860 | some challenges to trading and some market frictions
00:10:51.580 | that make it trade more like an EM country.
00:10:55.100 | So there can be slight differences like that.
00:10:57.700 | Now, Korea is a pretty big one, so that's the major one.
00:11:00.980 | But there's smaller ones, too.
00:11:03.020 | But for most countries, they're aligned between the indexes.
00:11:06.980 | And now let's talk about the two-ton gorilla
00:11:10.660 | in the room, which is China.
00:11:13.140 | China is a big country.
00:11:14.180 | They have a big economy.
00:11:16.100 | But it doesn't seem to be a very large percentage
00:11:19.820 | of the international indices or the emerging market indices.
00:11:26.020 | And why not?
00:11:27.580 | I also manage the emerging markets portfolio,
00:11:30.260 | so this is near and dear to my heart.
00:11:32.980 | So China actually has listings not just in mainland China,
00:11:38.300 | but they have listings in Hong Kong.
00:11:40.260 | They have listings in the US.
00:11:41.540 | They have listings in Singapore.
00:11:43.460 | The names that are listed in mainland China
00:11:47.700 | are capped at 30% foreign ownership.
00:11:51.660 | So all the indexes adjust for that foreign investment
00:11:54.980 | limitation.
00:11:56.180 | And then on top of it, it's not fully included.
00:11:58.940 | So for FTSE, they only have it at a 25% inclusion rate.
00:12:03.460 | And for MSCI, it's 20%.
00:12:06.140 | The reason is because there are frictions
00:12:08.980 | with the operations and the way the market trades that are
00:12:12.740 | different than other markets.
00:12:14.900 | So I think the index providers want
00:12:17.140 | to see some improvements in terms
00:12:18.980 | of some of those frictions.
00:12:20.580 | And then they'll continue to increase the weight down
00:12:22.820 | the road.
00:12:23.900 | So aside from restrictions on weights with China, perhaps
00:12:28.540 | a few other countries, the international indices
00:12:34.060 | are, for the most part, what's available to trade, I assume,
00:12:40.820 | is a cap-weighted index, free-float capitalization
00:12:45.940 | weighted, which means the stocks that
00:12:48.340 | are available for anyone to buy.
00:12:50.340 | Is that a fair assessment?
00:12:52.740 | That's a fair assessment.
00:12:53.740 | Especially the free-float factor is probably
00:12:55.740 | a very key element in the international market.
00:12:58.460 | So if you're looking on the US side,
00:13:01.180 | there's not a lot of companies that have a free-float factor
00:13:03.820 | that adjusts how much is available
00:13:05.700 | for external shareholders.
00:13:07.180 | When in Europe, if I take where I come from,
00:13:10.740 | you have state-owning part of certain critical companies,
00:13:14.700 | the same thing being the emerging markets.
00:13:16.500 | So what's actually available for foreigners or even
00:13:19.500 | regular shareholders to buy is smaller.
00:13:22.100 | So the index adjusts for that.
00:13:24.300 | So that would be probably a much bigger component
00:13:27.020 | of the index composition on the international side
00:13:29.980 | if you compare that to US indices
00:13:32.220 | have less of those free-float factors playing a role.
00:13:35.100 | So I just want to understand this.
00:13:37.300 | So it's basically the indices that are used in the US
00:13:40.260 | are for what US investors can buy, not all that's available.
00:13:45.260 | In other words, in China, they can only
00:13:48.340 | have a certain percentage that can be foreign investors.
00:13:52.540 | So we can only invest a certain percentage as US investors
00:13:58.420 | directly in China's stock market.
00:14:01.380 | But it could be much bigger than that.
00:14:04.220 | I mean, the market itself is much bigger, correct?
00:14:07.140 | It's just the indices that we use and the index funds
00:14:09.940 | that we have limit us to just what
00:14:12.420 | is available to US investors.
00:14:14.700 | Is that correct?
00:14:16.260 | It's not to US investors.
00:14:17.700 | So if you're looking at the China situation,
00:14:20.100 | it's like the foreign room is how much is available
00:14:22.260 | for foreigners to buy.
00:14:23.580 | So the index kind of cut it off.
00:14:25.500 | And that's more an arbitrary cut-off, actually,
00:14:27.580 | that's what's truly available.
00:14:29.980 | If you're looking free flow, it is truly
00:14:31.700 | looking at the ownership of any single company
00:14:35.100 | and taking out of that weighting,
00:14:37.820 | like the market capitalization of the company, what's
00:14:40.660 | not available for sale.
00:14:41.940 | So you have long-term cross-holdings.
00:14:45.180 | So if you're looking in Japan, you have Toyota buys a lot
00:14:48.100 | of their suppliers.
00:14:48.900 | They own 30% to 40% of the supplier's chain.
00:14:52.380 | That's never going to be available for shareholders
00:14:55.020 | of any Japanese or US or any person in the world to buy.
00:14:58.820 | So basically, what the index provider does,
00:15:01.300 | they reduce the market cap of the company
00:15:04.380 | from the full weight to what we call the free float weight.
00:15:08.820 | Now, all of the indices are calculated
00:15:14.660 | in native currencies.
00:15:16.620 | We don't have any currency hedging in the equity
00:15:21.500 | market, in the total international fund
00:15:24.220 | or the developed market fund or emerging market fund.
00:15:26.620 | Unlike our bond funds that we get through Vanguard,
00:15:30.420 | the equity funds are unhedged.
00:15:33.340 | So basically, if you're looking, the purpose of currency hedging
00:15:36.380 | is truly to diminish volatility over time.
00:15:39.620 | So over the course of the last few months,
00:15:41.660 | if you are European-based investors or US dollar-based
00:15:45.540 | investors, because of the way the currency has moved,
00:15:47.740 | you either made a lot of money or lost a lot of money
00:15:50.620 | just based on the currency movement.
00:15:52.660 | But over time, that volatility kind of eases out.
00:15:55.500 | So historically, the currency volatility
00:15:58.460 | over a period of 15, 20 years is really not a big element
00:16:02.100 | of your investment return.
00:16:03.940 | So for equity, which is an asset class that's normally,
00:16:07.420 | by itself, already volatile, it doesn't
00:16:09.580 | feel like it's really necessary to start
00:16:12.260 | diminishing the volatility of returns
00:16:14.460 | by trying to reduce the volatility of currencies.
00:16:17.980 | For the bonds, for which there's very little volatility
00:16:21.380 | in the investment returns themselves,
00:16:23.620 | the volatility of the currency can actually
00:16:25.620 | wipe out all your return that you will have.
00:16:27.700 | So for that, we offer currency hedging.
00:16:30.460 | So it's really based on the volatility of the asset class
00:16:33.460 | that that decision is being made.
00:16:35.780 | So at least the vanguard investors
00:16:38.460 | who are investing in the total international developed
00:16:41.100 | markets for emerging markets, it's an unhedged portfolio.
00:16:44.460 | There's no currency hedging.
00:16:45.940 | There's no currency hedging.
00:16:48.940 | The foreign markets I looked at this year,
00:16:53.140 | and kind of doing about as well as the US equity market,
00:16:56.620 | but what I noticed was if you take out this currency
00:16:59.900 | devaluation of foreign currencies
00:17:02.460 | and the appreciation of the dollar,
00:17:05.020 | that this year, international stocks
00:17:07.740 | in their native currencies, if they didn't have--
00:17:12.300 | if they were hedged, international stocks
00:17:14.300 | would be outperforming.
00:17:16.300 | By about 10%, they'd be outperforming the US,
00:17:18.540 | even though they'd both be down.
00:17:20.660 | It's because not only are the stocks down some
00:17:24.140 | internationally, but the strength of the dollar
00:17:27.540 | has pulled down foreign stocks to the point
00:17:31.100 | where they're about on par with the US market.
00:17:34.360 | But I don't think a lot of people realize
00:17:36.060 | that international stocks in their own native currencies
00:17:39.060 | are actually outperforming the US market.
00:17:41.700 | I believe-- and correct me if I'm wrong--
00:17:44.900 | one of the reasons why international stocks would
00:17:49.260 | have outperformed US stocks, if it wasn't for this currency
00:17:54.500 | difference with the strong dollar,
00:17:56.420 | is because of the structure of the industry groups
00:18:00.660 | in the international markets.
00:18:02.060 | They tend to be very different and have very different weightings
00:18:06.580 | than the US market, which tends to be heavy health
00:18:10.140 | care and heavy technology.
00:18:12.580 | So in your experience, can you tell us
00:18:14.940 | how the different weightings of industry groups between US
00:18:18.540 | and international does affect this difference in return
00:18:23.420 | and has affected the difference in return,
00:18:25.580 | say, over the last 10 years?
00:18:27.980 | It's basic theory in terms of pricing.
00:18:32.180 | So if you have cash flows that are in the future,
00:18:36.140 | you get in an area where there's rising interest rates,
00:18:39.580 | and you discount those future cash flows,
00:18:42.780 | industries like technology probably
00:18:45.020 | don't expect to generate profits until far in the future.
00:18:51.140 | So a lot of those companies are going
00:18:52.700 | to be more impacted in a period of raising interest rates,
00:18:56.740 | where if you look at foreign companies,
00:19:00.060 | there's a lot more financials.
00:19:01.940 | And a lot of the financials have maybe
00:19:04.540 | cash flows that are more short-term in nature.
00:19:08.660 | You're more likely to have dividend payments
00:19:12.220 | so that the interest rate rise wouldn't
00:19:14.540 | affect those types of companies as much
00:19:17.380 | as the technology companies.
00:19:20.220 | That could be a reason why an index with more financials
00:19:25.820 | is doing better once you strip out currency
00:19:30.540 | than technology indexes.
00:19:33.100 | You also have more basic materials.
00:19:35.060 | You have more energy.
00:19:36.340 | You have more industrials in the international markets
00:19:38.780 | than you have on the US market.
00:19:40.300 | So if you're looking at where we are from an energy perspective
00:19:44.100 | with the war in Ukraine and everything,
00:19:45.820 | so that has a tendency to probably have
00:19:48.660 | prospect of bringing short-term returns that
00:19:51.500 | are higher than in the technology
00:19:53.220 | sector for the reason that Mike explained.
00:19:56.580 | I did a compare on the Vanguard website,
00:19:59.380 | and I compared the Vanguard Total International Stock
00:20:04.220 | Fund to the Vanguard Total US Stock Fund.
00:20:07.860 | And when you do that, it gives you a lot of information.
00:20:10.620 | One set of information is this industry sectors.
00:20:15.220 | And the big ones, it seems to be,
00:20:17.780 | internationally, have a much bigger allocation
00:20:19.980 | to materials, financial services, industrials, energy,
00:20:26.460 | and a much lower allocation to health care and technology.
00:20:30.460 | So when you see these industry groups rotating around,
00:20:33.660 | this seems to be a good environment
00:20:36.420 | or has been a good environment for the more commodity-driven
00:20:40.660 | sector and financial-driven sector of the market, which
00:20:43.540 | would have normally caused international stocks
00:20:47.020 | to outperform if not for the fact that the US
00:20:49.580 | dollar has been strong.
00:20:51.840 | Now, the other thing that's interesting about the compare
00:20:54.420 | function on Vanguard and looking at these two funds side
00:20:58.900 | by side are the vast differences in valuations
00:21:03.620 | between price-to-earnings ratios,
00:21:07.100 | price-to-book ratios, earnings growth rates.
00:21:11.460 | And let me just go over them.
00:21:12.780 | The PE, price-to-earnings ratio, this
00:21:17.060 | is based on September 30th data.
00:21:19.820 | The total US stock market fund was about 17 times earnings.
00:21:25.460 | It was only 10 times earnings in the Vanguard Total
00:21:29.300 | International.
00:21:30.740 | The price-to-book in the US market
00:21:33.420 | was about three times book.
00:21:36.180 | It was half that in the international fund,
00:21:39.900 | the Total International.
00:21:41.540 | And the earnings growth rate in the US was around 20%.
00:21:45.820 | It was about half that internationally.
00:21:48.260 | So I always look at the international market
00:21:50.960 | and say, if I ever wanted to buy a value index
00:21:54.340 | without buying a value index, all I have to do
00:21:56.820 | is buy international stocks.
00:21:58.820 | Certainly, our investment strategy group
00:22:01.380 | is in agreement with your premise.
00:22:04.980 | So they definitely see that over the next 10 years,
00:22:08.900 | there's probably an opportunity for international stocks
00:22:12.640 | to have better returns than US stocks,
00:22:17.500 | primarily for the reasons that you said.
00:22:20.460 | PE ratios are much less.
00:22:22.620 | Price-to-book is much less.
00:22:24.660 | We just had currency moves, pretty substantial currency
00:22:28.700 | moves in the last few years where the dollar strengthened.
00:22:32.340 | So I think our investment strategy group
00:22:35.500 | is in agreement that there's probably
00:22:37.660 | more opportunity for equity-like returns
00:22:43.140 | in international equities than US equity.
00:22:46.180 | Historically, if you go back 30 years
00:22:48.200 | and you look at the PE ratios and price-to-forward earnings
00:22:52.860 | and so forth, emerging markets in particular
00:22:56.500 | are about the lowest they've been.
00:22:58.540 | And developed markets are getting pretty darn low also.
00:23:02.220 | So it really is an interesting--
00:23:05.060 | not to make a prediction about what's
00:23:06.560 | going to happen in the future, but just
00:23:08.500 | from a valuation standpoint, if there's
00:23:11.660 | any kind of a regression to the mean
00:23:13.500 | just for emerging market stocks and international stocks
00:23:16.420 | just to regress back to, say, 14 times earnings or something,
00:23:19.900 | which is sort of the middle of the road of where they normally
00:23:22.400 | trade at, 14 to 15.
00:23:23.620 | I mean, it does seem to me that if you're not
00:23:26.620 | in international equities, that it
00:23:28.180 | might be a good idea to diversify into them.
00:23:30.740 | And if you are in international equities,
00:23:32.980 | well, certainly don't make a decision based on the last 10
00:23:35.540 | years to get out.
00:23:36.920 | I also want to point out one more
00:23:38.340 | thing about international equities
00:23:39.740 | for people who need dividends.
00:23:42.060 | Gosh, I mean, I think the Vanguard Total International
00:23:46.500 | Index Fund right now is yielding about 4%.
00:23:51.140 | True, is that correct?
00:23:52.460 | Yes.
00:23:53.060 | So I definitely had looked at that recently, and that is true.
00:23:58.220 | It's 4%.
00:24:00.060 | Well, that's a phenomenal yield.
00:24:03.180 | If you're going to just-- if you believe that--
00:24:05.100 | even if the economy goes into a recession
00:24:06.780 | or the global economy goes into a recession,
00:24:08.660 | there might be some cuts in dividends.
00:24:10.240 | But still, if you get that cash flow for a retiree,
00:24:14.060 | and it is not a bad cash flow in their portfolio.
00:24:20.760 | I do want to mention, though, something
00:24:22.340 | having to do with the dividend.
00:24:23.620 | And we'll talk about this at a very high 30,000-foot level.
00:24:27.140 | But if you have international stock index
00:24:30.940 | funds in your taxable account, you
00:24:35.700 | don't get the full dividend.
00:24:37.420 | Some of the countries actually hold back
00:24:40.040 | a portion of the dividend that's paid to you as a US investor.
00:24:44.080 | They hold it back in the form of a tax.
00:24:47.400 | And the way that we get this money back
00:24:49.280 | is through a foreign tax credit that we take on our taxes.
00:24:53.760 | Now, this is only available to people
00:24:55.280 | who have international funds in their taxable portfolio.
00:25:00.000 | But can you talk a little bit about the foreign tax credit
00:25:02.880 | and how that works?
00:25:04.320 | So really, at the fund level, we get what you described.
00:25:07.920 | So tax in the fund itself.
00:25:10.140 | Granted, we have a great tax team at Vanguard.
00:25:12.480 | So there's a lot of treaties with the different countries
00:25:14.860 | that allow us to get back some of that taxation.
00:25:17.420 | So our tax team is really involved
00:25:19.700 | with all the different tax authorities across the globe
00:25:22.580 | to get as much back as we can based on those treaties
00:25:25.460 | that have been signed by the US government.
00:25:27.740 | So that's the first step of trying to prevent paying taxes
00:25:30.740 | is really having an engaged team that
00:25:33.500 | work with the custodian across the globe to get that back.
00:25:36.260 | When you're in a taxable account,
00:25:38.580 | you get a nice report from Vanguard
00:25:40.220 | at the end of every year that actually shows you
00:25:43.100 | how much of that tax that you pay
00:25:45.060 | that you can create from your US taxation.
00:25:47.180 | So that's how it works.
00:25:50.340 | I just want to make one caveat.
00:25:51.580 | A lot of people talk about putting the World Equity
00:25:55.100 | Fund in their taxable portfolio.
00:25:57.060 | But there is a little quirk in the IRS tax code--
00:26:00.380 | and again, I'm not a tax expert either--
00:26:02.460 | that says that unless the fund is more than 50%
00:26:05.660 | international, then you don't get this tax credit.
00:26:10.100 | So you wouldn't want to put the World Equity
00:26:11.940 | Fund in your taxable portfolio.
00:26:13.400 | You'd want to split it between the US Total Stock Index
00:26:17.580 | Fund and the Total International so you could get the tax credit
00:26:21.500 | from the international fund.
00:26:23.220 | So I wish I could say that you have the same tax
00:26:25.500 | advantage in Total World as you have in Total International.
00:26:28.940 | But it's different just because Total World
00:26:31.020 | has 60% of its asset invested in US security.
00:26:34.460 | So we don't get the tax credit back through Total World.
00:26:38.940 | So you're probably, from a tax perspective,
00:26:41.460 | better off choosing to use Total Stock and Total International
00:26:45.340 | to get the same exposure.
00:26:47.700 | Thank you for validating that.
00:26:49.740 | So now I'm going to talk a little bit more
00:26:52.420 | about these indices from various providers.
00:26:57.220 | The index providers have different ways of doing things.
00:27:01.260 | For instance, you're following two different FTSE indices
00:27:05.500 | for two of your different Total International Stock Index
00:27:09.340 | funds.
00:27:10.580 | The Bingard Total International Stock ETF
00:27:14.260 | follows the FTSE Global All Cap Ex-US Index,
00:27:22.180 | which has 7,991 constituents or names in it or companies in it.
00:27:29.620 | But then you also have another Total International Fund
00:27:33.380 | called the FTSE All World Ex-US.
00:27:38.020 | And that follows the FTSE All World Ex-US Index.
00:27:44.780 | So tell me what the difference is, please,
00:27:46.740 | between VXUS and VEU.
00:27:49.620 | I mean, the word "all cap" is in VXUS, and it's not in VEU.
00:27:58.220 | So please explain that.
00:28:00.180 | So Global All Cap, VXUS, is exactly that.
00:28:04.460 | It's all cap.
00:28:05.180 | So it's large caps, mid caps, and small caps.
00:28:09.620 | And it represents close to 100% of the market cap
00:28:15.020 | available in the world, ex-US.
00:28:18.340 | The FTSE All World is just large and mid caps.
00:28:23.260 | There are no small caps in the FTSE All World.
00:28:27.620 | The way that FTSE separates large, mid, and small
00:28:32.100 | is they try and take the top 86% of the universe,
00:28:37.460 | and they make that large and mid.
00:28:42.020 | Now, there's buffers so that names
00:28:44.540 | don't move between mid cap and small cap
00:28:47.700 | and helps reduce the turnover for investors.
00:28:51.380 | But in general, you can assume that FTSE All World is
00:28:56.260 | primarily large and mid and does not have small caps in there.
00:29:01.580 | OK, this is interesting because I also
00:29:03.660 | looked at your competitor, iShares,
00:29:07.060 | and they follow the MSCI ACWY Ex-US IMI Index.
00:29:13.740 | That has 4,300 names in it.
00:29:16.780 | And then Fidelity has a Total International Fund,
00:29:20.540 | and they follow the MSCI ACWY Ex-US Investable Market Index.
00:29:27.300 | That has 5,045 names in it.
00:29:31.380 | Fidelity also has the Fidelity Zero Fund, Total International.
00:29:35.940 | They call it, but it only has 2,458 names.
00:29:39.340 | So even though all of these funds
00:29:40.860 | are called Total International, really,
00:29:43.060 | the only true Total International Index Fund out
00:29:46.540 | there is the Vanguard Total International Stock ETF
00:29:53.860 | with the ticker VXUS, which has about 8,000.
00:29:57.060 | And all of the rest of them have at least 3,000 less.
00:30:01.900 | So if you really, really want a true Total International Index
00:30:06.060 | fund, it seems like you would go with the Vanguard Total
00:30:08.860 | International Stock Fund or ETF.
00:30:11.700 | Yeah, so the difference is methodology.
00:30:14.280 | And the methodology is that FTSE actually
00:30:17.820 | has more names in the index, because their cutoff
00:30:21.620 | to get into the index in terms of size
00:30:24.380 | is lower than what MSCI has.
00:30:27.660 | So it's lower because what FTSE does
00:30:31.020 | is they look at companies by region,
00:30:34.220 | rather than MSCI looks at it by developed and emerging,
00:30:40.420 | and then cuts across and says, this
00:30:42.420 | is the minimum market cap that we'll accept in our index.
00:30:46.140 | So the result is FTSE's thresholds for index entry
00:30:50.820 | are a lot smaller in terms of market cap
00:30:53.500 | than a lot of the other global markets.
00:30:56.140 | You have companies that are $100 million to $200 million
00:31:00.420 | market cap in terms of size, where MSCI cuts it off
00:31:04.780 | at about roughly $300 million.
00:31:07.500 | And it seems that even though the correlations
00:31:09.860 | between these funds are 0.99, or the R-squared is 99,
00:31:15.380 | it's very, very, very close, that in fact,
00:31:18.260 | there are these very, very, very minor differences.
00:31:21.580 | I looked at the 10-year performance,
00:31:23.860 | the Vanguard FTSE All World XUS and the Vanguard Total
00:31:27.940 | International Stock ETF over a 10-year period of time,
00:31:32.820 | ending in September 30th.
00:31:35.940 | And the Vanguard FTSE All World XUS ETF compounded at 3.32%,
00:31:45.820 | and the Vanguard Total International Stock
00:31:48.420 | Fund compounded at 3.34%.
00:31:53.060 | So I don't know if there's much difference between these two.
00:31:56.260 | But if you're going to--
00:31:57.780 | the market's down this year.
00:31:58.940 | If you own the Vanguard Total International Stock ETF
00:32:01.780 | and you want to take a tax loss, you could sell that stock fund
00:32:05.500 | and you could buy the FTSE All World XUS.
00:32:07.780 | It is a different index.
00:32:09.340 | It is a different fund.
00:32:10.180 | It has a different QCIP.
00:32:11.180 | So in my view, it's not substantially identical.
00:32:13.500 | But again, we're not tax experts here.
00:32:15.740 | But the performance is very close.
00:32:17.460 | And all of these funds, the performance is very close.
00:32:20.180 | Yeah, I would agree.
00:32:21.060 | I think methodology across all of the indexes
00:32:24.580 | conformed over the years.
00:32:26.260 | So everyone has load adjusted.
00:32:29.060 | Everything's based on market cap.
00:32:31.180 | Very similar methodologies in terms
00:32:34.140 | of when to include IPOs or secondary offerings.
00:32:39.340 | So it doesn't surprise me that the returns
00:32:41.900 | have been pretty similar.
00:32:43.820 | Well, I want to get into how you do your jobs now.
00:32:46.500 | I mean, you're in the US.
00:32:50.260 | You're trying to come up with an NAV at the end of the day
00:32:54.780 | for the Opened End Fund.
00:32:56.820 | The ETF is trading in the US during our normal business
00:33:01.180 | hours, but all of these markets are closed.
00:33:04.580 | So how do you do that?
00:33:06.460 | I mean, you get money into the fund.
00:33:07.940 | You have to put it to work.
00:33:09.060 | You tell me on a day-to-day basis,
00:33:11.260 | it's much harder to manage these international stock funds
00:33:15.180 | when the markets are closed.
00:33:17.140 | How do you do that?
00:33:18.140 | European market closed around 11.30 AM.
00:33:21.740 | So after 11.30 AM, basically, the only thing
00:33:23.980 | that's really investable is Canada and Latam,
00:33:26.540 | which is a very small portion of that portfolio.
00:33:29.940 | So if we get any cash flow, what we will go,
00:33:31.820 | we will revert to the futures market, which
00:33:33.940 | is trading all the way to 4 PM New York time.
00:33:37.540 | So we will invest what we are receiving in the future market
00:33:41.580 | and then create trading days for the following day
00:33:43.740 | where we can invest, basically, in the local market.
00:33:46.660 | So we will do a switch from futures to equities.
00:33:50.500 | As those markets open, we will send trades, actually,
00:33:53.700 | across the globe, which I was one of the first ones
00:33:56.180 | they sent trades to.
00:33:57.300 | But that's why we have that presence across the globe.
00:33:59.620 | We have presence in London.
00:34:00.940 | We have presence in Melbourne, in Australia.
00:34:03.500 | And we actually ask those traders that
00:34:06.260 | are really part of our team, they're an extension of us,
00:34:08.900 | to look at the future position, look at the equities,
00:34:11.260 | and help us transform that future risk into equity risk
00:34:15.300 | and make sure that the investment is done smoothly.
00:34:17.460 | So they understand the market.
00:34:18.980 | They know how to trade.
00:34:20.500 | They know how to source liquidity.
00:34:22.740 | They really are our partners into the management
00:34:25.460 | of the funds as they're trading.
00:34:27.460 | Yeah, just to confirm what Christine said,
00:34:31.340 | we rely on the local expertise of our trading desk.
00:34:35.620 | We have one in the UK, one in Australia.
00:34:38.340 | They've become experts in those markets.
00:34:42.180 | So they are trying to save as much cost
00:34:44.460 | as we can for the ultimate investor.
00:34:47.140 | We're constantly evaluating the tools
00:34:49.460 | that we use to access those markets.
00:34:51.980 | We're using the ones that perform better.
00:34:54.660 | There's an evaluation process.
00:34:56.220 | We have a transaction cost team that
00:34:59.700 | looks at all of our trades on a regular basis
00:35:03.140 | and gives us feedback--
00:35:04.940 | not just us, but the other regions--
00:35:07.380 | about what tools that we use perform the best.
00:35:11.540 | We continue to use the ones that work the best more so.
00:35:15.660 | So transaction costs are huge.
00:35:18.620 | And it's like saving that nickel in the copier machine.
00:35:22.220 | We're trying to add the same costs around the edges.
00:35:26.300 | And ultimately, it means better returns for our investors.
00:35:30.460 | Michael, could you elaborate on transaction costs?
00:35:35.900 | Here in the US, we've gotten to the point
00:35:37.820 | where it seems to be almost a de minimis
00:35:40.540 | amount for mostly mid-cap and large-cap stocks.
00:35:43.340 | But that's not true with a lot of emerging markets
00:35:47.180 | and even some developed markets.
00:35:48.620 | Can you kind of give us an overview
00:35:50.220 | of how much it costs to trade in various countries
00:35:54.060 | and which ones are expensive, which ones are not?
00:35:56.420 | And how expensive is it for a vanguard
00:36:00.660 | total international fund investor
00:36:02.740 | to hold the fund from a transaction standpoint?
00:36:06.900 | So in terms of commissions, commission rates
00:36:09.260 | we get in the US are very, very low.
00:36:12.300 | And the spreads in the market are very tight.
00:36:16.220 | When you go overseas, some markets trade well.
00:36:20.100 | But others do not.
00:36:21.980 | So if we trade in Latin America and we're
00:36:24.700 | trading a mid-cap or a small-cap name in Mexico or Brazil,
00:36:29.740 | the spreads are going to be wider.
00:36:31.620 | The costs to settle the trades are
00:36:33.060 | going to be significantly more.
00:36:34.900 | And the commissions that we pay to the broker
00:36:37.900 | will be significantly more.
00:36:39.820 | So as a portfolio manager, we try and balance those costs
00:36:43.900 | when we go to trade.
00:36:45.380 | I always say that trading is a minus.
00:36:50.620 | It's a net cost.
00:36:52.060 | So what we try and do is reduce that cost.
00:36:56.020 | And we have some techniques.
00:36:57.260 | We have some optimizations where maybe we don't
00:36:59.660 | buy every name in the index.
00:37:01.580 | We just buy a sample that will allow us to track the index.
00:37:05.980 | And then the next time we run a list,
00:37:08.260 | it may be a different set of names.
00:37:10.180 | But we'll be able to track the index
00:37:12.380 | and, at the same time, reduce those fixed costs and spread
00:37:18.100 | costs in trading.
00:37:21.020 | And if I can add to that, so when
00:37:23.340 | I look at how I started at Vanguard,
00:37:25.220 | that was basically my role when I was sent to Europe
00:37:27.940 | to create the trading desk, is to find ways
00:37:30.220 | to save all shareholders money by improving our execution
00:37:34.220 | costs.
00:37:34.740 | So really, by having a person on the ground,
00:37:36.940 | you get a good feeling of what is a fair price to pay.
00:37:40.860 | You don't pay overcharges for that.
00:37:43.460 | And then you can really, truly look
00:37:45.140 | at ways to optimize that spread cost that you have to pay.
00:37:48.580 | Because you know how to source liquidity,
00:37:51.220 | who to call, how to use--
00:37:53.780 | we have crossing networks.
00:37:55.860 | We have closing mechanism.
00:37:57.820 | You interact with the market.
00:38:00.420 | So those are things that we get engaged with.
00:38:04.580 | We are active and engaging with both regulators and exchanges
00:38:09.900 | to make trading in those foreign markets
00:38:12.580 | better and less costly for investors.
00:38:15.460 | So we're on a lot of industry panels.
00:38:17.860 | We're on the index committees.
00:38:20.420 | We're engaging directly with exchanges
00:38:23.900 | to try and advocate for our shareholders
00:38:26.180 | and make things better.
00:38:28.860 | Can you talk a little bit about proxy voting?
00:38:30.740 | I know that you don't do proxy voting yourself.
00:38:32.860 | But how is it done in foreign equities?
00:38:35.540 | And do they do it the same way in South Korea or the Philippines
00:38:41.660 | that they do in the United States?
00:38:43.900 | We, our team-- so the team that's
00:38:46.020 | managed out of Maverick, but has presence in, actually,
00:38:48.900 | Australia and in the UK as well, vote every proxy voting.
00:38:53.660 | So basically, they have a team that research
00:38:56.020 | what the best option is in the proxy voting
00:39:00.260 | for the long-term investor.
00:39:01.860 | So that approach has not changed.
00:39:03.820 | It's the same across the globe.
00:39:05.420 | So if you're familiar to what we do for US stocks,
00:39:07.500 | we basically do the same thing across the globe.
00:39:10.460 | It's more time intensive, because it's
00:39:12.020 | in different languages.
00:39:12.980 | And you rely on the custodian to translate the documentation.
00:39:16.140 | But the research and the attention
00:39:17.780 | to what is the right vote is the same.
00:39:20.980 | We don't necessarily vote in line
00:39:22.740 | with the big companies that recommend how to vote.
00:39:25.700 | We have our own team and our own analysis.
00:39:28.500 | And sometimes, we engage directly with the company.
00:39:30.660 | So we have a team in London that have
00:39:32.940 | a huge amount of engagement with companies directly,
00:39:36.060 | where they set up the board.
00:39:37.420 | They talk about what Vanguard values are
00:39:39.980 | and how we think about long-term value for shareholders
00:39:44.140 | in that sense.
00:39:45.140 | And they're truly engaged.
00:39:47.100 | And to be honest, we also engage with certain governments.
00:39:49.740 | Like last week, I was talking to a government
00:39:52.460 | in a European country for the same reason.
00:39:54.580 | They have questions around proxy voting
00:39:56.540 | and how we really want to have a voice for shareholders
00:40:01.180 | in their interest.
00:40:03.340 | I want to turn now to the ETF and open-end mutual fund.
00:40:08.980 | And at Vanguard, it's a little bit different.
00:40:10.900 | You've got an ETF as a share class of the open-end fund.
00:40:16.900 | But the interesting thing about ETFs
00:40:20.020 | is that they trade during the day.
00:40:23.460 | The foreign ETFs that are covering
00:40:25.380 | the total international fund, the emerging market fund,
00:40:28.420 | the developed market fund, these ETFs
00:40:30.820 | are trading during the day.
00:40:32.540 | Do they trade close to where these futures trade
00:40:35.780 | that you were talking about?
00:40:36.900 | I mean, when you go to price the NAV of the open-end fund
00:40:41.740 | at the end of the day, does the ETF pricing--
00:40:46.260 | is that any kind of a price discovery vehicle
00:40:48.860 | that you're using to help determine
00:40:51.180 | what the price of the open-end NAV
00:40:54.380 | is at the end of the day, which would be the price
00:40:57.140 | that open-end fund shareholders would transact
00:40:59.660 | with?
00:41:00.700 | Sure.
00:41:01.180 | ETFs are a great proxy.
00:41:03.540 | At least the ones that trade and have significant volume
00:41:07.980 | are a good indication of where a market should be priced.
00:41:12.540 | So if Taiwan is closed and we need
00:41:16.340 | to look at where we should price that market,
00:41:20.500 | they can look at a lot of different factors.
00:41:22.860 | They can look at ADRs that trade in this country.
00:41:25.620 | They can look at ETFs, whoever's ETF it is that trades.
00:41:29.740 | And it's a decent approximation, because the people that
00:41:33.220 | are making markets in those products
00:41:36.860 | want to actually set bid and offers that are fair.
00:41:42.140 | So they wouldn't want to set an offer that was maybe too low,
00:41:46.460 | because people could potentially take advantage of it.
00:41:50.540 | So ETFs are a pretty good proxy for what we call fair value.
00:41:57.740 | I want to stay on ETFs for just one more minute,
00:41:59.700 | because a lot of investors do use ETFs.
00:42:03.300 | And when they go to put the order in to buy an ETF
00:42:07.500 | or to sell an ETF, if they're putting it
00:42:09.180 | in in the middle of a trading day for VXUS or VEU,
00:42:14.340 | generally the spread between the bid and the ask
00:42:17.380 | is maybe one penny.
00:42:19.220 | So it's very tight.
00:42:21.460 | And we've been told that you should put in limit orders
00:42:26.220 | on what you--
00:42:28.820 | when you're buying, you should put in a limit
00:42:30.980 | on how much you're willing to pay for this ETF shares.
00:42:34.340 | And when you're selling, you should put in a limit
00:42:36.900 | on how much you should take when you sell your shares.
00:42:40.020 | But it seems to me there is so much liquidity.
00:42:44.620 | The pool of liquidity in VXUS and VEU
00:42:48.620 | is so large that even when we put in fairly sizable orders,
00:42:54.140 | you get pricing.
00:42:56.780 | Often, when you're trying to buy,
00:42:59.300 | you get pricing even at the bid price.
00:43:02.380 | And when you're trying to sell, you
00:43:04.660 | get the better ask price, which is flip-flopped.
00:43:07.060 | But could you comment on that?
00:43:09.460 | Because it seems to be very good pricing just
00:43:12.300 | by putting in market orders, even though we're told
00:43:14.980 | by the ETF experts out there that you shouldn't
00:43:17.420 | put in market orders.
00:43:18.940 | I think it depends on the size of your order.
00:43:21.500 | So if you have a really small order, you're safe.
00:43:25.140 | You're safe going market.
00:43:26.940 | If you have a larger order, it probably
00:43:29.300 | warrants using a limit order.
00:43:31.260 | So for the regular retail investor
00:43:33.300 | that's trading less than 100 shares, or 100 shares,
00:43:36.860 | or 200 shares, you're probably fine.
00:43:39.540 | If you're trading a block or 1,000 shares,
00:43:42.580 | maybe be a little more careful with setting limit orders.
00:43:46.340 | Problem with setting limit orders
00:43:47.760 | is you subject yourself to something
00:43:49.420 | called adverse selection.
00:43:51.620 | So if you're on the bid side and the market drops,
00:43:57.140 | you're probably more likely to get
00:43:59.380 | done if it goes through you.
00:44:01.440 | So that's not great execution.
00:44:04.020 | So I'm with you.
00:44:05.380 | I think small orders--
00:44:06.980 | I think people are fine putting market.
00:44:09.260 | I think it's the larger orders, you want to use limit orders.
00:44:13.180 | I've had some very large investors
00:44:15.660 | who have purchased $10 million.
00:44:18.380 | I mean, these are retail investors
00:44:19.820 | who have a lot of liquidity after selling
00:44:23.340 | a business and so forth.
00:44:24.580 | And they're buying $10 million of VXUS at a time.
00:44:31.380 | I recommend that they call Vanguard to do this.
00:44:35.580 | Is that something that you recommend also?
00:44:38.100 | We do have a capital markets area
00:44:40.780 | that deals with institutional investors or investors of size.
00:44:45.780 | Basically, there are market makers in the market
00:44:48.980 | that our capital markets team will
00:44:50.660 | work with to set up what a fair bid offer
00:44:55.900 | price would be in the market.
00:44:58.020 | So you may have one of the market makers
00:45:00.660 | make a price if it's that kind of size.
00:45:05.060 | And we also know who holds liquidity.
00:45:07.700 | So we know from a market maker, like the authorized
00:45:10.340 | participant point of view, which is basically
00:45:12.420 | the people transacting in the second market
00:45:14.900 | and really transacting directly with us,
00:45:16.740 | we know who owns an inventory of those shares.
00:45:20.020 | So I can tell you certain brokers that are big names
00:45:24.780 | hold a lot of shares of VT.
00:45:26.580 | I could tell you if it's VT or VA,
00:45:28.580 | I know exactly who I will send you to.
00:45:30.660 | Just because of our interaction with them,
00:45:32.500 | we know they have a tendency to interact
00:45:35.140 | with what we call the primary market, which
00:45:36.900 | is directly with us by the exchange of shares in kind.
00:45:39.940 | So we could guide you to people we know can make a market
00:45:43.540 | for you in that ETF.
00:45:45.260 | So that's not a bad call at all, because we have that knowledge.
00:45:49.780 | Well, let's break it down then.
00:45:51.260 | If you're going to do less than 1,000 shares,
00:45:54.220 | then it's probably OK to put in a market order.
00:45:56.380 | If you do it during the middle of the day,
00:45:58.140 | not at the beginning of the opening or at the close,
00:46:00.340 | but in the middle of the day when things are trading,
00:46:03.020 | then you're probably going to get good pricing.
00:46:04.420 | You really don't have to worry about putting in limit orders.
00:46:06.940 | But if you're going to put in more than 1,000,
00:46:09.820 | then you might want to try a limit order and see.
00:46:14.180 | But again, sometimes it's difficult.
00:46:17.500 | Like you said, Michael, the market's moving against you.
00:46:20.660 | You could end up paying more.
00:46:22.660 | But at some point, you're going to want
00:46:25.020 | to contact the market desk at Vanguard
00:46:30.100 | and have them do the trade for you.
00:46:32.340 | Would you say that that would be like a 10,000 share
00:46:35.260 | order or more?
00:46:36.860 | What do you suggest?
00:46:38.420 | So I'm not sure what the exact dollar amount.
00:46:41.260 | I think it's more institutional size,
00:46:44.700 | so maybe larger than, say, 10,000 shares.
00:46:48.420 | Yeah, I don't think we-- we don't really
00:46:50.140 | trade our own ETFs, because we have restrictions in place.
00:46:53.260 | So I think we are not.
00:46:55.780 | OK, no, that's fine.
00:46:57.380 | But it is some much larger amount.
00:46:59.000 | And I think if you're going to do a big trade like that,
00:47:01.380 | a trillion-dollar trade, that you
00:47:02.780 | would be able to contact Vanguard directly on that.
00:47:05.820 | And they would help you out.
00:47:07.140 | That's if you're custodying at Vanguard.
00:47:09.060 | If you're custodying somewhere else,
00:47:10.540 | you would have to contact the broker that you're working with.
00:47:14.500 | If you had a crystal ball--
00:47:15.860 | and I know we don't--
00:47:17.300 | in closing, tell me your thoughts
00:47:19.140 | about the future of emerging markets
00:47:21.980 | and the future of developed markets.
00:47:23.740 | What do you think?
00:47:24.740 | Well, I can tell you what makes us different
00:47:27.460 | than other index desks.
00:47:29.740 | I think we have a little bit more flexibility
00:47:32.980 | as portfolio managers, because we are also the traders, too.
00:47:37.100 | So we can identify opportunities in the market that can save
00:47:42.620 | costs better than other places.
00:47:45.320 | Normally, the setup is portfolio manager
00:47:49.220 | gives a trade to a trading desk.
00:47:51.340 | And the trading desk is incentivized,
00:47:54.260 | one, to get the order done, and two,
00:47:58.020 | not to get done in a way that they would be questioned.
00:48:01.460 | For us, since we are the portfolio manager
00:48:04.580 | and the trader, it gives us a little more leeway
00:48:07.300 | in terms of figuring out how to save costs.
00:48:10.700 | For example, last week, there was a share increase
00:48:14.340 | in a UK stock.
00:48:15.880 | The deal had closed where they were buying a US company.
00:48:19.140 | And we were able to buy the exposure of the UK name
00:48:22.580 | in the form of a US stock and actually bought it
00:48:25.340 | 3% cheaper.
00:48:27.180 | Now, we have risk areas that keep us in line so
00:48:31.380 | that we don't take undue risk.
00:48:34.180 | But it's examples like that where
00:48:35.740 | we have a little bit more flexibility than other shops.
00:48:39.940 | And we are constantly fighting for every last nickel that's
00:48:44.900 | in the market, because we know ultimately
00:48:48.620 | our objective is to get the best returns for our shareholders,
00:48:52.100 | give them the best chance for investment success.
00:48:56.420 | I have to say that when looking at the performance of all
00:48:58.580 | the different international equity index
00:49:02.300 | funds that are the total funds, broad market funds,
00:49:05.940 | this way you trade and the low fee that you have,
00:49:09.620 | but more probably the way you trade,
00:49:11.820 | actually does come out in the performance.
00:49:14.100 | I see that over a few years compounded
00:49:17.540 | that Vanguard always seems to be ahead by maybe 0.1%,
00:49:23.660 | sometimes a little more, sometimes a little less.
00:49:25.820 | But in the long term, this ability
00:49:27.900 | to trade better and get better pricing
00:49:30.900 | does show up in the performance, which
00:49:34.380 | is why I tend to prefer personally the Vanguard total
00:49:39.260 | market ETFs.
00:49:40.300 | But at times when I'm doing tax loss harvesting
00:49:43.540 | and things are moving quickly and need
00:49:45.200 | to move around between different international index funds,
00:49:48.780 | would move out into something else.
00:49:50.860 | But I appreciate very much what you do at Vanguard for all
00:49:54.540 | of us, and Christine, do you have anything else you'd
00:49:57.460 | like to say before we close?
00:49:59.660 | The European markets close around lunchtime.
00:50:01.940 | I was trading European markets here in the US,
00:50:04.340 | and the entire trading desk went for lunch.
00:50:07.260 | So I was the only person standing there.
00:50:09.020 | Mr. Vogel came through the door, like,
00:50:10.980 | how are the markets doing?
00:50:12.500 | And I was so taken by what I was trading,
00:50:14.780 | because it's like the peak time for my work,
00:50:17.180 | that I started rambling through what the London Stock
00:50:20.220 | Exchange was doing, what the Euronext Exchange was doing,
00:50:23.660 | France and Germany, and just trying really
00:50:26.100 | to articulate the vision of what all the European markets were
00:50:28.820 | doing, because I was proud of it.
00:50:30.420 | And it's Mr. Vogel and sitting right there,
00:50:32.340 | and I'm just very, very young.
00:50:33.780 | And I remember his puzzled look looking at me like,
00:50:36.820 | what is she talking about?
00:50:39.460 | Yeah, Mr. Vogel doesn't believe in international investing.
00:50:43.100 | So you were way, way off track.
00:50:46.740 | Yeah, Jack Vogel had two things that he stuck with.
00:50:52.900 | And number one was, why do you need international stock?
00:50:56.780 | We sell product overseas.
00:50:58.780 | We get our exposure that way.
00:51:00.740 | That was one of his viewpoints.
00:51:03.220 | And the other one was how he hated exchange-traded funds.
00:51:06.020 | So if you're a international fund manager who's
00:51:09.380 | trading the Vanguard ETFs, I mean,
00:51:11.620 | you're not on his Christmas list.
00:51:13.220 | Sorry.
00:51:14.580 | Mr. Vogel liked us.
00:51:15.980 | He would come in every once in a while
00:51:17.940 | to talk to us during the day.
00:51:19.780 | And it was a great kind of experience
00:51:22.060 | to have him come by and say hello.
00:51:24.980 | And he was that type of person.
00:51:26.740 | He would go over to the cafeteria
00:51:28.980 | and have his peanut butter and jelly sandwich.
00:51:31.780 | And he would hold open court to anyone
00:51:33.540 | who wanted to sit down and chat with him.
00:51:35.660 | He really was a people person and loved the crew here.
00:51:39.540 | So he's missed, no doubt.
00:51:42.900 | Well, thank you so much for both of you
00:51:44.740 | for joining us today on Vogel Heads On Investing.
00:51:47.780 | I greatly appreciate this discussion.
00:51:49.700 | And have a great 2023.
00:51:52.420 | Thank you for having us.
00:51:53.660 | Thank you.
00:51:54.740 | This concludes this episode of Vogel Heads On Investing.
00:51:58.820 | Join us each month as we interview
00:52:00.860 | a new guest on a new topic.
00:52:02.580 | In the meantime, visit vogelcenter.net, vogelheads.org,
00:52:06.900 | the Vogel Heads Wiki, Vogel Heads Twitter.
00:52:09.340 | Listen live each week to Vogel Heads Live on Twitter Spaces,
00:52:12.820 | the Vogel Heads YouTube channel, Vogel Heads Facebook,
00:52:15.620 | Vogel Heads Reddit.
00:52:17.260 | Join one of your local Vogel Heads chapters
00:52:20.180 | and get others to join.
00:52:21.500 | Thanks for listening.
00:52:22.300 | [MUSIC PLAYING]
00:52:25.660 | [MUSIC PLAYING]
00:52:29.020 | (upbeat music)
00:52:31.600 | you