Morningstar Magazine - December 2017/January 2018 - 56

Strategies

Small Cap, Wide Range
One of the cheapest and best-diversified options
in the foreign small-cap space.
BEST IDEAS: PASSIVE

Daniel Sotiroff

Vanguard FTSE All-World ex-US Small-Cap ETF VSS

This article is adapted from the ETF's Morningstar Global Fund Report dated
Oct. 19, 2017.

Stats 10/31/2017

Vanguard FTSE All-World ex-US Small-Cap ETF VSS is a solid small-cap fund
with some admirable characteristics. Its broad reach captures the
investment opportunity set that is available to active managers in the foreign
small/mid blend Morningstar Category, and a low fee should provide a
sustainable advantage over more expensive alternatives. These characteristics
underpin its Morningstar Analyst Rating of Silver.

The heavier allocation to stocks from developing nations has hurt the fund's
category relative performance in recent years. Both total and risk-adjusted
returns have landed in the bottom decile of its category over the trailing
three and five years through September. Its volatility was below the category
average over these periods, however, thanks to its extensive diversification. K
Daniel Sotiroff is a passive strategies analyst with Morningstar Research Services.

Morningstar Category
Foreign Small/Mid Blend

Expense Ratio
0.13%

Category Average Expense
1.36%

5-Yr Annlzd Return
9.04%

5-Yr % Rank in Cat
82

Morningstar Pillars 10/31/2017
Process
∞ Positive

The fund tracks the FTSE Global ex-US Small Cap Index, and the managers use
a sampling technique to replicate the index's performance. This allows
the fund to avoid the smallest stocks in the benchmark, which can be expensive to trade. The managers also generate ancillary income for the fund
through securities lending, which helps offset its expenses. The approach has
worked well, as the fund has trailed its benchmark index by an amount less
than its expense ratio over the past three and five years through September.

Performance
§ Negative

Morningstar December/January 2018

Parent
∞ Positive

Price
∞ Positive

$14K
12.73
12.6412

FTSE Gbl SmallCap Ex US TR

10
Vanguard FTSE All-Wld ex-US SmCp ETF
10/2012

10/2013

10/2014

10/2015

8

10/2016

Morningstar Ratings 10/31/2017

Morningstar Style Box 9/30/2017

Mstar
Mstar
Mstar
Fund Centroid
Risk
Rating
weighted avg. of Period Return
equity holdings
QQ
3-Yr
Below Avg Below Avg
Zone
75% of fund
equity holdings

5-Yr

Below Avg Below Avg QQ

10-Yr

-

-

-
QQ

Overall Rating

Deep Core Core Core High
Value Value
Grwth Grwth

World Regions 9/30/2017

Regions
Americas

■ Stocks %

Greater Europe

38.13

Greater Asia

38.99

54.39
46.02
85.93

Developed Mkts
Emerging Mkts

 Regional Exposure %

❙ Cat Avg

6.62 15.85

96.51

3.49 14.07
0%

56

People
∞ Positive

Growth of 10K 10/31/2017

Micro Small Mid Large Giant

Small-cap stocks tend to be more highly leveraged to their local markets than
their larger counterparts, so this fund can offer good diversification
benefits. The fund holds just under 3,000 stocks listed in foreign developed and
emerging markets, the top 10 of which represent less than 3% of the
portfolio. It effectively captures the investment opportunity set, but its country
and regional composition differs from the category norm in some important
ways. The majority of funds in the foreign small/mid blend category maintain
fairly small allocations to Canadian and emerging-markets stocks. This fund has
roughly 9% of its assets in Canadian-domiciled stocks, twice the category
average. It also has a 6% exposure to Taiwan compared with the 1% category
average. Offsetting that, it has smaller allocations than peers to stocks from
developed nations such as Japan and the U.K. All told, the fund
spreads its bets over a wider range of regions.

Morningstar Analyst Rating
*

25

50

75

100

Americas

Greater Europe Greater Asia



Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018

Contents
Morningstar Magazine - December 2017/January 2018 - Cover1
Morningstar Magazine - December 2017/January 2018 - Cover2
Morningstar Magazine - December 2017/January 2018 - 1
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Morningstar Magazine - December 2017/January 2018 - Contents
Morningstar Magazine - December 2017/January 2018 - 4
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