IEFA vs. VXUS: Both Are Cheap. Both Are Broad. Here Is the Key Difference Long-Term Investors Need to Understand.
Key Points
The iShares Core MSCI EAFE ETF (IEFA) invests only in developed market stocks outside of the United States and Canada.
The Vanguard Total International Stock ETF (VXUS) offers more comprehensive global coverage across both developed and emerging markets.
Vanguard's more diversified approach is better for an all-in-one investment fund.
- 10 stocks we like better than Vanguard Total International Stock ETF ›
As core international stock ETFs go, the iShares Core MSCI EAFE ETF (NYSEMKT: IEFA) and the Vanguard Total International Stock ETF (NASDAQ: VXUS) are among the best. Both have expense ratios of less than 0.1%. Both hold thousands of stocks, making diversification a non-issue.
But they're not nearly the same. Their target markets are different. Their key holdings are different. Their sector exposures are different. Both can act as core international equity funds, but the reality of these ETFs is very simple: One is a complete international fund, and one is not.
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iShares Core MSCI EAFE ETF
IEFA tracks the MSCI EAFE IMI Index, which covers around 2,600 stocks from nearly two dozen developed markets outside the United States and Canada. Japan (26%) and the U.K. (14%) alone account for around 40% of the portfolio. Financials (23%), industrials (19%), and tech (12%) are the top three sector holdings.
But the key point is that the iShares Core MSCI EAFE ETF holds only developed-market stocks. That means you'd need to pair this fund with an emerging markets fund, such as the iShares Core MSCI Emerging Markets ETF, to cover the entire international equity market.
Top holdings of IEFA include:
- ASML Holding: 2.8%
- HSBC Holdings: 1.3%
- Roche: 1.2%
- AstraZeneca: 1.2%
- Novartis: 1.1%
This fund is the choice if you want solely stocks from developed markets or if you're interested in pairing it with a second fund for total international exposure.
Vanguard Total International Stock ETF
VXUS tracks the FTSE Global All Cap ex-US Index, which holds around 8,700 stocks across both developed and emerging markets. Around 26% of the fund is in emerging markets, with the remainder in non-U.S. developed markets, including Canada. Japan (15%), Taiwan (9%), and the U.K. (8%) are the biggest country allocations. Financials (22%), tech (21%), and industrials (15%) are the top three sector holdings.
The biggest distinction, again, is that the Vanguard Total International Stock ETF invests in virtually all non-U.S. stocks worldwide. It's more comprehensive globally, which is reflected in the much smaller country weightings. The addition of emerging markets gives the tech sector a much larger weighting, especially in some of the larger artificial intelligence (AI) stocks of the moment.
Top holdings include:
- Taiwan Semiconductor Manufacturing: 3.98%
- Samsung: 2.19%
- SK Hynix: 1.86%
- ASML Holding: 1.39%
- Tencent Holdings: 0.74%
This fund is the choice if you want total international stock coverage in a single ticker.
VXUS is a better choice than IEFA
From a simplicity standpoint, the Vanguard Total International Stock ETF is the better choice. Including both developed and emerging markets in a diversified equity portfolio is preferable, given that the latter category includes many of the big foreign tech companies driving the AI theme at the moment.
The iShares Core MSCI EAFE ETF is reasonable enough if you want to stick just with developed economies. But the diversified approach is the better one.
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HSBC Holdings is an advertising partner of Motley Fool Money. David Dierking has positions in Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends ASML, AstraZeneca Plc, Taiwan Semiconductor Manufacturing, and Tencent. The Motley Fool recommends HSBC Holdings and Roche Holding AG. The Motley Fool has a disclosure policy.
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