Vanguard Target Retirement Funds Changes: Increased International Exposure

A lot of people own Vanguard Target Retirement 20XX Funds, and I just noticed that Vanguard made an announcement that they will be making some changes:

The international equity weighting will be increased to 30% of the overall stock portion fund, up from about 20%.Three of the funds (European Stock Index, Pacific Stock Index, and Emerging Markets Stock Index) will be replaced by a single fund, Vanguard Total International Stock Index Fund.The Total International Stock Index Fund itself is making some changes. Its benchmark index will switch to the MSCI All Country World ex USA Investable Market Index, which differs from the previous index by adding exposure to Canada and Israel, as well as adding a ~13% allocation to small-cap companies.

All of these changes sound good to me, even if it is another example of Vanguard following the herd. The very first target retirement funds had no exposure to Emerging Markets. Emerging got hot, and then Vanguard added to their funds. Investors have been increasing their international exposure as well recently, and 20% was less than their competitors like Fidelity and starting to look old-fashioned. (Perhaps this is another move away from the philosophies of founder Jack Bogle.)

This also means most Target funds will consist of just three funds:

Vanguard Total Stock Market Index FundVanguard Total International Stock Index FundVanguard Total Bond Market II Index Fund

The stated reasons are for increased simplification and diversification (and a little less volatility perhaps), and not for any increase in expected future returns. Here’s a Q&A from Morningstar with Vanguard CIO Gus Sauter about the topic.

I still like this series of all-in-one funds for those people who like the idea of auto-pilot and have all their retirement savings in tax-deferred accounts like 401ks and IRAs. They are simple, reduce your stock exposure gradually over time, keep costs low, and rebalance regularly for you. You can also adjust your risk level by choosing a different target year.

I held the Vanguard Target Retirement 2045 (VTIVX) for a while. After selling it, I’ve found it very easy to let my asset allocation shift.

However, if you have both taxable and tax-deferred investment accounts, splitting up your bonds and stocks for optimal tax-efficiency can help you increase your after-tax returns.

Find more in Investing, Retirement | 10/4/10, 6:24pm | Trackback

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