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Originally launched in 2007, the former Vanguard MSCI EAFE exchange-traded fund (ETF) became the Vanguard FTSE Developed Markets (VEA) ETF in May 2013, when it switched away from tracking the MSCI EAFE Index. The official reason given for the switch was a reduction in index-licensing costs.
The current underlying index for VEA is the FTSE Developed ex North America Index. This index is structured to reflect the performance of nearly 1,400 large- and mid-cap companies across nearly two dozen developed markets (mostly in Europe and Asia). It is considered to be ex North America because it excludes companies from the United States and Canada.
This will not be the last change for Vanguard's offering, however. It has been announced that the VEA will transition away from the FTSE Developed ex North America Index and into the FTSE Developed All Cap ex U.S. Index. VEA will pick up exposure to Canadian stocks and small-caps from non-U.S. developed markets. Early estimates suggest the change will create an 8% turnover in the portfolio.
Even after adding some exposure to North America, the VEA portfolio will remain highly diversified across European and Japanese holdings. As of mid-2015, the top five holdings – Nestle (NESN), Novartis (NVS), Roche (RHHBY), Toyota (TM) and HSBC (HSBC) – only account for 7.25% of the entire portfolio's value.
VEA is not quite as regionally diverse. Nearly one-quarter of the portfolio comes from Japanese companies and another 20% from the United Kingdom. Other countries with more than 5% exposure include Switzerland, France, Germany and Australia.
One of Vanguard's tax-managed funds, VEA belongs in the Foreign Large Blend category. It is managed by Vanguard and advised by Vangaurd Group, Inc. VEA, like most Vanguard ETFs and mutual funds, is notable for its passive, low-turnover approach and incredibly low costs.
Foreign Large Blend ETFs commonly carry expense ratios of 0.35% or higher, and the Lipper peer average expense ratio for 2014 was 1.39%. VEA only has an expense ratio of 0.09%, which is far below industry average and is even considered low for a Vanguard ETF. Expense ratios for funds do not include fees associated with brokers or other trading costs.
Vanguard describes VEA's strategy as a passively managed, full-replication fund. This means that it literally aims to track its underlying index in an identical pattern. Even though it avoids the U.S. market, investors can find, track and trade VEA through the New York Stock Exchange Arca.
Suitability and Recommendations
As with all equities in foreign markets, the Vanguard FTSE Developed Markets ETF carries market risk, currency risk and political risk. The fund's decision to avoid emerging markets could potentially reduce future returns, but it also helps to avoid volatility and other emerging market risks.
Interested investors might find it difficult to anticipate movements in VEA. The fund has a history of changing indexes