VT vs. VXUS: Strategic Allocation for Global Diversification in a Taxable Portfolio

In the pursuit of global diversification, investors often weigh the merits of broad-market ETFs like Vanguard Total World Stock ETF (VT) and Vanguard Total International Stock ETF (VXUS). For taxable portfolios, the decision hinges on cost-efficiency, tax implications, and risk-adjusted returns. This analysis evaluates these factors to guide strategic allocation.

Cost-Efficiency: Expense Ratios and Portfolio Structure

Vanguard's VT, with an expense ratio of 0.06% as of Q3 2025, remains a cost-effective option for global exposure. However, VXUS, which focuses on international markets, carries a slightly lower expense ratio of 0.05%. A critical nuance emerges when considering portfolio structure: splitting allocations between VTI and VXUS creates a blended portfolio with a weighted expense ratio of 0.0456%, undercutting VT by 2.44 basis points. While this strategy requires active management, it underscores the importance of granular cost analysis in taxable accounts.

Tax Implications: Foreign Credits and Loss Harvesting

Tax efficiency is where VXUS gains a distinct edge. As a purely international fund, VXUS qualifies for a foreign tax credit, with estimates suggesting up to 0.225% of its value could be credited to investors. In contrast, VT, which includes 61% U.S. equities and 39% foreign holdings, does not offer this benefit due to its mixed structure.

Additionally, VXUS enables more precise tax loss harvesting. Investors holding it alongside a U.S.-focused ETF (e.g., VTI) can selectively offset gains in one market without liquidating the other. By contrast, VT's global blend limits loss harvesting to periods when the entire fund declines in value. These advantages make VXUS particularly appealing for taxable accounts seeking to minimize drag from taxes.

Risk-Adjusted Returns: Sharper Performance in VXUS

Risk metrics further tilt the balance toward VXUS. As of 2025, VXUS boasts a Sharpe ratio of 1.87 versus VT's 1.59, indicating superior returns per unit of risk. The Sortino ratio, which emphasizes downside risk, also favors VXUS at 2.61 compared to VT's 2.24. Volatility, while similar (15.76% for VXUS vs. 17.21% for VT), tips slightly in VXUS's favor. The Calmar ratio-a measure of returns relative to maximum drawdown-further highlights VXUS's efficiency, at 1.95 versus VT's 1.11. These metrics suggest VXUS offers a more favorable risk-reward profile for long-term investors.

Strategic Allocation: Balancing Objectives

The choice between VT and VXUS ultimately depends on investor priorities. For those prioritizing simplicity and broad global exposure, VT's 0.06% expense ratio and low turnover of 3% make it a compelling option. However, taxable investors seeking to optimize for tax credits, loss harvesting, and risk-adjusted returns may find VXUS-and by extension, a VTI/VXUS split-more advantageous.

Conclusion

While VT remains a stalwart of global diversification, VXUS's tax benefits and superior risk-adjusted performance position it as a stronger choice for taxable portfolios. Investors should weigh the trade-offs between simplicity and granularity, aligning their strategies with both financial goals and tax circumstances.