Global Exposure: The Vanguard Choice Between VT and VXUS

The central question for a global investor is whether U.S. exposure is necessary for true diversification. The answer lies in the stark structural difference between Vanguard's VT and VXUS. VT is a global fund that includes U.S. stocks, while VXUS is designed to hold only non-U.S. equities. This simple distinction creates a fundamental divergence in portfolio makeup, performance, and risk.

The most immediate difference is in asset allocation. VT carries a 63% exposure to stocks from the United States, making it a vehicle for global diversification that still includes the home market. VXUS, by contrast, is a pure-play on international markets, excluding the U.S. entirely. This structural choice leads directly to divergent sector exposures. VT's portfolio is heavily weighted toward technology, with NVIDIA, Apple, and Microsoft as its top holdings. VXUS, however, tilts toward financial services, industrials, and technology in non-U.S. markets, with its largest positions including companies like Taiwan Semiconductor and Tencent. The fund's sector mix is financial services (22%), industrials (16%), and technology (15%), reflecting the economic structures of its target markets.

Performance and income profiles further highlight this divergence. Over the past year, VXUS has delivered a 26.71% return, outperforming VT's 19.59% return. This gap is partly driven by the higher dividend yield of the international fund, which offers a 3.2% yield compared to VT's 1.8% yield. The higher yield is a function of the different markets and companies held, often including more mature, dividend-paying firms in developed and emerging economies. However, this outperformance comes with a trade-off in volatility. VXUS has experienced a max drawdown of 32.7% over five years, which is deeper than VT's 28.0% drawdown. The fund's price action also shows greater recent sensitivity, with a 5-day change of -1.243% compared to VT's -0.5098%.

The bottom line is that these funds serve different portfolio roles. VT provides a broad, diversified global basket with a significant U.S. anchor, which can offer stability and exposure to the world's largest tech companies. VXUS is a tool for targeted international diversification, offering higher yield and potentially stronger recent returns but with a more concentrated, non-U.S. sector tilt and greater volatility. For an investor, the choice is not about which fund is better, but which structural profile aligns with their existing portfolio and their definition of global diversification.

Mechanics of Diversification and Risk

The core difference between VXUS and VT is one of scope and its resulting risk-return profile. VXUS offers a pure, concentrated bet on non-U.S. markets, while VT provides a globally diversified platform. This structural choice translates directly into portfolio characteristics, risk metrics, and long-term growth potential.

VXUS's exposure is defined by its exclusion of the U.S. market. The fund holds 8,663 stocks across developed and emerging non-U.S. markets, creating a vast but geographically narrow diversification. Its sector tilt is distinct, with financial services (22%) and industrials (16%) as its largest allocations. This composition makes the fund highly sensitive to global economic cycles, currency fluctuations, and regional political risks. The consequence is a deeper historical drawdown, with a maximum drawdown of 32.7% over five years, compared to VT's 28.0%. This greater volatility is the price of its concentrated international focus.

VT, by contrast, leverages the full breadth of the global economy. It includes the massive U.S. market, which accounts for 63% of its exposure. This creates a more balanced sector mix, with technology as its largest holding at 28%, followed by financial services and industrials. The inclusion of the U.S. market acts as a stabilizing anchor, dampening the fund's overall volatility. The result is a shallower drawdown and a more resilient portfolio structure.

The divergence in risk manifests starkly in long-term compounding. Over five years, a $1,000 investment grew to $1,523 for VT versus $1,239 for VXUS. This $284 gap is not a minor difference; it represents the superior long-term growth power of a more balanced, diversified basket. The U.S. market's historical outperformance, combined with the fund's broader global reach, has consistently delivered a higher net return. For an investor, this means VT's structural advantage in diversification directly translates into a tangible compounding benefit over time.

The bottom line is that diversification is not just about holding more stocks; it's about holding the right stocks. VXUS's deep international diversification is valuable for portfolio allocation, but its concentrated sector tilt and geographic focus create higher volatility. VT's global platform, anchored by the U.S., provides a more stable foundation for growth. In practice, the choice isn't just about international exposure-it's about accepting a higher-risk, higher-cost path to that exposure versus a lower-risk, higher-return path that includes the world's largest economy.

Cost, Liquidity, and Portfolio Fit

For investors choosing between VXUS and VT, the decision hinges on three practical factors: cost, liquidity, and how each fits into a broader portfolio. The numbers here are tight, but they matter.

VXUS holds a slight edge on cost, with an expense ratio of 0.05% compared to VT's 0.06%. While the difference is minimal, it represents a persistent, compounding drag on returns over time. More significantly, VXUS offers a higher dividend yield of 3.2% versus VT's 1.8%. This makes VXUS more attractive for cost-conscious or income-focused investors, though it comes with a trade-off in volatility, as VXUS has experienced a larger max drawdown over five years.

Liquidity is another key differentiator. VXUS trades with a clear advantage, boasting a higher average daily volume of 3.99 million shares compared to VT's 2.68 million. This greater trading activity typically translates to tighter bid-ask spreads and easier execution, especially for larger orders. For investors prioritizing ease of entry and exit, VXUS's higher volume provides a tangible practical benefit.

The strategic fit, however, is where the funds diverge most fundamentally. VT includes a massive 63% exposure to U.S. stocks, making it a global equity fund. VXUS, by contrast, focuses exclusively on non-U.S. markets. This distinction is critical for portfolio construction. For an investor with heavy U.S. equity holdings elsewhere, VXUS serves as a pure, efficient vehicle to gain diversified international exposure without doubling down on domestic risk. It's a tool for correcting a portfolio imbalance. VT, conversely, is a complete global portfolio in a single fund, ideal for those seeking broad diversification from the outset.

The bottom line is a choice between efficiency and completeness. VXUS wins on cost and liquidity for international exposure, making it a leaner, more liquid choice for filling a specific gap. VT offers a broader, all-in-one global solution but at a slightly higher cost and with lower trading volume. The right fund depends on the investor's existing portfolio and whether they need a pure international tilt or a comprehensive global basket.