(PUB) Investing 2015

Index’s daily return and the return of its ETF shares varied by as much as 1.4% to 1.8% on a couple of days. As I said, differences between ETF and open- end fund performance tend to even out within a day or two, and unless you’re trading in and out of the open-end fund, which Vanguard will quickly put a stop to once their computers catch up, you shouldn’t worry too much about fair- value pricing. With all of that said, and with August’s primer on investing over- seas as backup, here’s where Vanguard stakes its foreign investing claims. Developed Markets Index Sell. Once a fund of funds, Developed Markets Index now holds individual stocks, just like the rest of Vanguard’s foreign funds. While the benchmark the fund tracks has changed over time, and is changing again, its mission remains the same: Tracking a broad set of stocks from established foreign markets. The new index to which the fund will tran- sition, the FTSE Developed All Cap ex-U.S. index, includes smaller stocks as well as Canadian stocks, something the fund did not hold in previous incar- nations. Based on historical data, these additions have added to performance over time, though up/down volatility has also increased. As you might expect, Developed Markets Index ignores the emerging markets component that one finds in Total International Stock Index or World ex-U.S. Index . And there’s the rub. If you buy into the index- ers’ credo that one should index “all” markets rather than a slice of the pie, then this fund is a non-starter. However, if you’re tempted, remember that the fund has ETF shares (VEA) available. Emerging Markets Stock Index Hold. Here’s another fund that’s getting a new benchmark, but this one is fraught with issues that you won’t find in Vanguard’s other funds. As Jeff and I have reported before, most recently in the July letter, Vanguard is making a push into the volatile A-shares market of mainland China. The FTSE Emerging Markets All Cap China A Inclusion index is the first

of Vanguard’s benchmarks to venture into the highly regulated and opaque mainland China arena. Vanguard has already said that it’s going to have to deviate from the index by “sampling” rather than “replicating,” and this new index will be adjusted by FTSE on an ongoing basis because of the limits that the Chinese government puts on foreign entities’ ownership of A-shares. But this isn’t some huge change overall. While the small caps that will be added to this fund will increase holdings sub- stantially, the exposure to China should only grow by about 3% from the cur- rent 27% or so. The emerging markets are consid- ered a growth engine, internationally, but they’re also riskier than mainstream domestic markets. And China’s slow- down, just as Vanguard is upping the ante there, begs the question of whether the risk-return balance favors returns as much today and tomorrow, as it has in the past. Also, are the large-cap domestic companies you own today already giv- ing you enough exposure to emerging markets through their global opera- tions, or do you need and want a focused fund such as this one? I think a small allocation here can make sense, as there will always be local companies that will understand and be able to take advantage of local markets in a fashion the bigger global conglomerates won’t. That said, it’s not a risk I’m taking right now. As with Vanguard’s other foreign index funds, there are ETF shares (VWO) available. Emerging Markets Select Stock Hold. Vanguard’s first and only move into active management in the emerging markets space looked good at the onset, but has proved a loser. It was a cautious move—doling out portions of the portfolio to four separate firms: Wellington, M&GCapital Management, Oaktree Capital Management and Pzena Investment Management. Having four firms on this fund reduc- es the risk of a single manager misstep, but at the same time limits the ability of any one manager to add significant

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certainly less than $10 billion), Vanguard probably can’t get too jazzed up about jumping into that fray. The only real excitement going on among the foreign funds these days has been the June announcement that Vanguard would add smaller stocks to Developed Markets Index , Emerging Markets Stock Index , European Index and Pacific Index , along with a new allocation to mainland-China A-shares in the emerging markets fund, something I wrote about in the July 2015 issue. In the past, I’ve noted that since Global Equity became multimanaged in 2004, Vanguard hasn’t had a foreign fund run by just one management team for years. Global Minimum Volatility breaks that streak, though its non-tra- ditional investment objective makes it a bit of an outlier. In the August letter, we took an in- depth look at investing overseas and whether it makes sense to hew to a 40% (of equities) allocation to foreign stocks at all times, as Vanguard seems to believe, or to allow the markets and your head and heart to determine where your allocation should stand. One thing we didn’t discuss was the actual funds themselves. So, let’s do that. But first, I do want to mention something called fair-value pricing, which is the day-to-day manipulation of fund prices (not ETF prices) that Vanguard engages in (as required by the SEC) to prevent attempts to jump ahead of news events that may cause market moves in time zones many hours different from our own. Investors might, for instance, try to trade Pacific Index, which has about 60% of its assets allocated to Japanese stocks and another 25% or so in Australian and Korean stocks, when those markets are closed and there is major, market-mov- ing news occurring in those countries while U.S. markets remain open. The difference between the price of a fund’s regular shares and its ETF shares can sometimes tell the tale of a Vanguard intervention. Last year, for instance, Emerging Markets Stock

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