Vanguard Developed Markets Index Fund Review (VDMIX, VDMAX)

Vanguard Developed Markets Index Fund provides investors with low-cost diversified exposure to developed foreign markets. This fund invests in companies in developed markets in Europe, Asia, and Australia, which make up about 75% of the non-U.S. equity market. The focus is on non-U.S. stocks.

Composition

Vanguard Developed Markets Index Fund tracks the Spliced Developed Markets Index. It invests in 920 companies in Europe and Asia-Pacific regions. Europe comprises of 64% of the holdings, Asia-Pacific region comprises of 35.5% and 0.5% is devoted to companies in the Middle East. The top 10 holdings make up for approximately 15% of the investments.

Performance

Because of the great recession of 2008-2009 and due to the Euro Zone crisis over the last two years, Vanguard Developed Markets Index Fund has not performed well. The fund has returned 11.24% over the past year, 5.17% over the past three years, -0.75% over the past five years, and 9.69% over the past decade as of 4/30/2013.

[caption id="attachment_687" align="aligncenter" width="493"] Vanguard Developed Markets Index Fund Performance[/caption]

Risks

Investing in a foreign market fund, in general, and Vanguard Developed Market Stock Index Fund, in specific, is not without risks. The fund’s exposure to in foreign stock markets can be riskier than U.S. stock investments. Also, the world events such as the Euro Zone Crisis of the past two years may adversely affect the value of securities issued by companies in foreign countries or regions.

Expenses

The annual expense ratio of the Investor class shares  ($3,000 minimum) of the Vanguard Emerging Markets Stock Index is just 0.20%, while the Admiral class shares’  ($10,000 minimum) expense ratio is 0.10%. So for every $10,000 invested for 10 years, Vanguard charges a total of just $50 (for Investor class) or $25 (Admiral class) per year to manage this basket of stocks. This is so cheap that there is no way an individual investor could replicate the underlying holdings themselves for such a price.

Final Thoughts

Vanguard Developed Markets Index Fund provides a great way for long-term, buy and hold investors to diversify their international portion of their portfolio into developed markets. This fund is only offered as an index mutual fund and not through ETF. Another reason why I prefer investing in mutual funds over ETFs.

Even though the fund is a bit volatile than its equivalent US stock market funds, it also represents potential for growth. Since stocks of companies outside the US represents 75% of the total world markets, it is good opportunity to capture those market slices through this fund. Since the fund is volatile, you may want to keep a small to moderate amount of asset allocation to this fund. As always, past performance is not a guarantee of the future returns.

Disclosure: I own Vanguard Developed Markets Index Fund Admiral Class shares in my portfolio. Also, see Vanguard Index Fund Portfolios for suggested portfolios.