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If you only consider returns (and not trading fees or total expense ratios or tracking errors as mentioned by D Stanley below), what would be the difference between a single ETF and several ones matching the composition of that single ETF?

For instance, the Vanguard Total International Stock ETF (VXUS) tracks the FTSE Global All Cap ex US Index and region allocation is 22.20% Emerging Markets today.

On the other hand, the Vanguard FTSE Developed Markets ETF (VEA) tracks the FTSE Developed All Cap ex US Index, and the Vanguard FTSE Emerging Markets ETF (VWO) tracks the FTSE Emerging Markets All Cap China A Inclusion Index.

What would be the difference between investing in VXUS only and investing in 77.80% in VEA and 22.20% in VWO (with let's say, annual rebalancing)?

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Excluding trading fees, expense ratios, and tracking error (which you didn't mention) then, in theory, there should be no difference. I would also say that you wouldn't rebalance annually in this case, since the weighting of EM within the broad index should not be constant - it should change with the relative performance of EM stocks.

Obviously, with global funds, it's much harder (if not impossible) replicate the index completely, so each of the funds will make selections to try and match the index as closely as possible, so there could be different tracking errors due to stock selection between the funds.

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  • Thanks. I edited my message to mention tracking error. Do you mean that instead of rebalancing based on a fixed EM weight (22.20% in my example), I should do it based on the weighting of EM within the broad index? – Antoine Dusséaux Jan 15 '20 at 21:18
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    Yes, which, again in theory, should match your allocation all else being equal. In other words, if EM increases 10% and the rest of the world is flat, both the index's and your EM allocation should increase to ~24% – D Stanley Jan 15 '20 at 21:28
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My first three thoughts are:

  1. expense ratios (which might benefit you if the individual funds are cheaper than VXUS),
  2. realized capital gains tax when re-balancing taxable accounts to maintain the correct ratios, and
  3. lower barrier of entry: if you buy mutual funds, the smallest percentage fund would still require a (typically) minimum $3,000, so you'll need a lot more like $15,000 to do your own meta-diversification.
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