Vanguard ESG International Stock ETF VSGX has a market-cap weighted portfolio of foreign stocks exhibiting favorable environmental, social, and governance characteristics. Despite ESG screens that narrow the portfolio slightly, its broad diversification and low fee give this fund a durable advantage. 

The fund tracks the FTSE Global All Cap ex US Choice Index. It targets small-, mid-, and large-cap stocks from most international markets and excludes firms with close ties to fossil fuels, vice products, and weapons. Companies with poor conduct related to the environment, human rights, labor, and diversity are also omitted from the portfolio. These screens whittle down the investment universe slightly, but the fund still holds almost 6,000 names, considerably more than many peers. 

The final portfolio weights its holdings by market capitalization. Market-cap weighting is an efficient way to size holdings because it harnesses the market's consensus opinion of each stock's relative value. Stocks that grow in size take up a larger share of the portfolio, while shrinking companies that may be struggling will have less importance.

Diversification is a strength of this portfolio despite ESG screens that remove around 25% of the investment universe. The fund holds more than 5,900 stocks, with its 10 largest positions accounting for just 12% of assets. No one position accounts for more than 2% of the allocation. Some of this fund’s largest holdings are Asian-listed conglomerates like Tencent, Samsung, and Toyota.

Including emerging-markets stocks widens the scope of this fund relative to some peers, ESG considerations notwithstanding. The average fund in the foreign large-blend Morningstar Category allocates less than 10% of their portfolios to these stocks, while this fund typically weights them closer to 20%. This may give the fund a leg-up since emerging-markets stocks historically have paid for their higher volatility with strong returns during market rallies. However, their recent struggles have hurt the fund’s category-relative performance in recent years. 

Low fees were not enough to overcome the poor performance of emerging-markets stocks as well as the omission of some strong performers that failed ESG screens this fund applies. From its September 2018 inception through October 2023, this fund lagged its average peer by 15 basis points annually, with similar volatility. The omission of several high-performing industrials stocks held the fund back relative to peers.

Analyst Rating

Total foreign stock exposure with an ESG tilt.

Analyst

Zachary Evens

ASML Hld

National Energy Services Reunited

AstraZeneca

SAP SE

Novan

Rogers

Royal Bank of Canada

ClearBridge American Energy MLP Fund, Inc.

Autoliv

Toronto-Dominion Bank

The fund seeks to capture most of the international stock market while excluding stocks exhibiting unfavorable ESG traits. Market-cap weighting keeps the portfolio well-diversified while effectively minimizing turnover, supporting an Above Average Process Pillar rating.

Above Average

Process

The Vanguard equity index group boasts seasoned managers and a dedicated supporting staff well-equipped to provide tight index tracking, earning it an Above Average People rating.

Christine Franquin and Scott Geiger comanage this strategy. Franquin, a principal at Vanguard, has been with the firm since 2000 while Geiger joined in 2006. They share responsibility for the fund and have since its 2018 inception. While there have yet to be any manager changes on this strategy, Vanguard frequently rotates its managers to promote breadth and depth across the team, soi we do not expect the manager change to disrupt the strategy in any way.

The managers are responsible for the fund's trading, providing more portfolio insights than a stand-alone trader. They are supported by a global team of dedicated personnel and sophisticated, scalable technology that optimize precision and reduce the managers' workload. Vanguard's independent risk management team works closely with the managers to monitor trades and review any potential issues. Managers' compensation is tied to performance using a combination of tracking error and excess return metrics, which aligns their interests with investors'.

People

As The Vanguard Group settles on new senior leadership, it retains a High Parent rating.

Vanguard announced current CEO Tim Buckley will step down by the end of the year, marking an end to his 33 years at the firm. Historically, Vanguard has pronounced CEO retirements while simultaneously signaling who (from inside the firm) would take over. In this instance, Vanguard’s board said it will evaluate internal and external candidates in the coming months to find its next, and fifth, leader, though it also promoted CIO Greg Davis to president.

Vanguard flourished in several respects under Buckley’s leadership. Assets under management have grown by two thirds over his six years at the helm, while its asset-weighted average US fund fee ratcheted lower to 0.08% at the end of 2023. Vanguard further refined its advice business through its low-cost Digital Advisor platform and more holistic Vanguard Personal Advisor Services, and it debuted promising investment options.

Vanguard has had its share of challenges under Buckley, too. Growing its business outside the US has proved difficult, and ex US investors account for less than 10% of AUM. Between 2019 and 2023, Vanguard’s efforts to build its China business underwent dramatic shifts, with the firm ultimately abandoning plans to launch low-cost index funds there. It also ended a partnership with Ant Financial to provide advisory services to retail investors. Inside the US, customer service issues have continued to be a problem, and some of Vanguard’s newer offers, such as margin loans, seem a departure from a more-conservative approach to investing.

Vanguard retains an investor-friendly culture at its core that’s burnished by a commitment to low costs and supported by its unique mutual ownership structure and direct-to-investor playbook.

High

Parent

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