VTI vs VXUS

#What this plan actually returned

These are real results, not estimates. We ran $10,000 up front plus $500 a month from September 9, 2016 to September 9, 2026 (10.0 years), with dividends reinvested, against actual daily closing prices for each fund.

#Reading the result

VTI finished roughly $39,000 ahead on identical contributions, an annualized gap of a bit over four percentage points. For anyone who has held a globally diversified portfolio for the last decade, this table is a familiar and slightly painful sight.

But look at the drawdown column, because it undercuts the usual justification for holding both. VXUS did not merely underperform. Its worst decline was slightly deeperthan VTI’s, about 36 percent against 35 percent. The international allocation gave up return without delivering the smoother ride it is typically added to provide.

#The diversification benefit did not show up when it was needed

Diversification works when assets fall at different times. The dates in this backtest show the opposite happening. Both funds bottomed on March 23, 2020, the same day. In a genuine global panic, correlations between equity markets converge toward one, which is precisely when a diversifying asset would be most valuable and precisely when it tends to stop diversifying.

VXUS’s worst window is also revealing in its length. It ran from January 26, 2018 all the way to March 23, 2020, more than two years of grinding decline, where VTI’s worst episode was compressed into about five weeks in early 2020. International investors did not get a different outcome so much as a slower, longer version of a worse one.

#What each fund holds

VTI(Vanguard Total Stock Market ETF) holds essentially the entire investable US equity market, several thousand companies across large, mid, small, and micro capitalizations, weighted by market cap. In practice its returns track the S&P 500 closely, because cap weighting means the largest companies dominate regardless of how many small ones are included.

VXUS (Vanguard Total International Stock ETF) holds everything else: developed markets including Japan, the United Kingdom, and the eurozone, plus emerging markets including China, India, Taiwan, and Brazil. Several thousand companies across dozens of countries and currencies.

One structural point that gets overlooked: VXUS returns are reported in US dollars, so a strengthening dollar reduces them even when the underlying foreign stocks rise in their home currencies. The dollar was broadly strong across much of this window, and that currency translation is a real component of the gap in the table, not a footnote.

#Why the US concentration argument cuts both ways

The US now represents a historically large share of global market capitalization. Two conclusions get drawn from that same fact, and they point in opposite directions. One says the US market has demonstrated durable structural advantages and deserves the weight. The other says a market at a historically extreme share of global capitalization is exactly the kind of position that has mean-reverted before.

This backtest cannot settle that. It reports one decade. The 2003 to 2008 comparison reports a different one, in which international exposure led by a wide margin, and running both is more informative than running either alone.

#What to test

• →Run 2003 to 2008 and 2016 to today back to back. The ranking reverses completely, which is the most important thing to understand about this pairing.
• →Add VT, the total world fund, as a third ticker. It holds both in market-cap proportion and shows what the blended outcome actually looks like.
• →Extend the window to 20 years if you want a period containing both regimes rather than only the recent one.
• →Check the drawdown column in every window you run, not just the return column. The diversification claim is a risk claim, so test it on risk.