Better International ETF: VXUS vs. VSS

The modern economy is increasingly global. Innovation and the internet have made it easier to travel and trade between countries. It's only natural that your investment portfolio reflects this trend. Although the U.S. stock market is the world's largest and many of the largest corporations operate in America, tons of excellent international stocks deserve your capital.

For most individual investors, exchange-traded funds (ETFs) are the best way to add that international exposure to their portfolios. International ETFs help overcome language and regulatory barriers associated with investing in foreign markets.

Two excellent non-U.S.-focused ETFs are the Vanguard Total International Stock ETF (NASDAQ: VXUS) and the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEMKT: VSS). Vanguard is a trusted and iconic name in the ETF industry, but these two specific funds have some key differences.

Which ETF is better? It might depend on you.

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Understand this crucial nuance of investing in non-U.S. markets

Investing globally requires knowing the difference between developed and emerging markets.

When you're used to investing within the U.S. stock market, it can be easy to take America's economy for granted. Sure, there are speculative stocks, risky companies that often go bust or disappoint. But the U.S. economy, government, and stock exchange system offer a unique stability that's not a given in most other countries. Developed markets include the U.S. and other established countries, such as Japan, Sweden, and France.

Emerging markets are the other side of this equation. These markets can offer exciting growth potential, but they're typically riskier because the countries aren't as stable. Some examples of emerging markets include India, Brazil, and South Africa. It's often wise to invest in both developed and emerging markets, but it's crucial to understand the difference and how far an ETF might lean in either direction.

Comparing these two international Vanguard ETFs

Both of these Vanguard ETFs share some fantastic positives.

They have Vanguard's legendary name, and both ETFs have a minimum investment of just $1, so they can fit into any investor's budget or portfolio size. Additionally, each ETF charges very low fees. The Total International Stock ETF has an expense ratio of just 0.05%, while the FTSE All-World ex-US Small-Cap ETF's expense ratio is only slightly higher at 0.06%. That's just $5 and $6, respectively, on $10,000 invested. It's a no-brainer -- a minuscule price to save investors the work of analyzing countless non-U.S. stocks.

These ETFs also have similar exposure to emerging markets. The Total International Stock ETF is 26.3% invested in emerging markets, while the FTSE All-World ex-US Small-Cap ETF is only slightly more aggressive at 28.7%.

The key difference between these ETFs lies in their broader strategies and construction. The Total International Stock ETF invests in thousands of stocks, with a median market cap of $54.8 billion. The FTSE All-World ex-US Small-Cap ETF, as its name suggests, focuses on small-cap stocks, with a median market cap of just $2.5 billion.

Small-cap stocks tend to be more volatile but can deliver greater long-term growth. That shows in each ETF's long-term performance. The FTSE All-World ex-US Small-Cap ETF has generated annualized total returns of 9.79% since 2009, far better than the Total International Stock ETF's 6.73% since 2011.

Which ETF is better?

There's a famous correlation between risk and reward. The FTSE All-World ex-US Small-Cap ETF has an impressive record, but small-cap non-U.S. stocks can feel like riding a roller coaster at times. If you're comfortable with that, the FTSE All-World ex-US Small-Cap ETF could be the right ETF for you.

However, many investors, due to their age, risk tolerance, or other factors, may not want all that volatility. In that case, the Total International Stock ETF is probably the better pick. Remember, both ETFs come from Vanguard and have nearly identical fees and minimums. This comparison ultimately comes down to what you, the individual investor, feel more comfortable with.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard FTSE All-World ex-US Small-Cap ETF. The Motley Fool has a disclosure policy.