Morningstar Report:
Vanguard Emerging Markets Stock Index is a solid offering, but not as magical as its current numbers might suggest.
Through Dec. 1, 2005, this passively managed fund, which attempts to match the return of a customized version of an MSCI emerging-markets index, has an astounding trailing three-year average annual return of 34.4%. That includes a year-to-date showing of 26.6%. If you had a decent amount of money in funds performing at that torrid pace for any appreciable length of time, you likely could move up your retirement date by a decade or so.
Of course, such dreams are just that--dreams. True, this fund's trailing three-year return is no fluke or gimmick. It does a reasonably sound job tracking its benchmark and has low expenses, and many companies in its portfolio are impressive firms--global leaders in their fields. The reason it has such a high three-year (and 2005) return is that emerging markets have generally been on fire, outperforming even the rallying markets in Western Europe and Japan. And this fund has done at least as well as its rivals in the diversified-emerging-markets category. It is in the middle of that group for the year to date and is ahead of two thirds of them for the three- and five-year periods.
However, it's highly unlikely that the fund will continue to post annualized returns of nearly 35%. And given the history of emerging markets, it's possible it could suffer sharp losses--it has in the past. Those facts are essential to keep in mind while evaluating this fund now. Also keep in mind that you probably already own emerging-markets stocks to some degree if you own broad-based international funds.
In short, this is a sound option (though the exit fee charged even to long-term shareholders is hard to justify); just be sure to keep expectations in check.
See Previous Analyst Reports
Year Total Return (%) +/- Category
YTD 32.05 0.41
2005 32.05 0.41
2004 26.12 2.35
2003 57.65 2.30
2002 -7.43 -1.71
Data through 12-31-2005
Fund Family Score for International Stock: 3.4
Number of Funds Scored: 12
From a cost perspective, Vanguard's foreign offerings can't be beaten. They are by far among the cheapest offerings within their respective categories. Although the indexed options don't always blow the lights out, their returns have usually been competitive and some, such as Vanguard European Stock Index, have been standouts over time. Investors should note, however, that the indexes some funds track, such as Emerging Markets Stock index, are homespun creations that don't include the broadest range of countries. The actively managed funds--which are all subadvised--are more of a mixed bag, although Vanguard does a nice job monitoring fund subadvisors.
Role in Portfolio
Specialty. Because of its emphasis on potentially volatile markets and the fact that most international funds already contain emerging-markets exposure, this fund is best kept to a small portion of an investor's portfolio.
ETA: A Morningstar Subscription is well worth the investment.