Under the hood – Vanguard international index funds in 2019

Vanguard issues annual reports for the firm’s international and global index funds on October 31 of each year. The reports provide information that can highlight some of the underlying conditions affecting a fund’s future capital gains distribution outlook; an indication of a fund’s foreign tax credit; the level of security lending in each fund, and a means of measuring investor turnover in the funds.

Tax implications

Capital gains

Mutual funds are legally structured as pass-through conduits of investment income. The income usually comes from dividends and interest received from securities or by profits realized by selling securities. By law, the fund must distribute income and gains to shareholders or else pay tax on retained income. Funds cannot, however, pass realized losses on to shareholders. These losses are retained by the fund, and can be used to offset future gains.

Taxable shareholders are no doubt pleased when they open their 2019 annual reports and see that none of the Vanguard international index funds has distributed a capital gain over the past five fiscal years.

While not distributing gains, the funds at times realize net gains during a given fiscal year. Often a fund will offset any realized gains with realized losses, or use retained loss carryovers to offset gains, thus providing shareholders zero capital gains distributions. In 2019,  the Vanguard International High Divided Index fund used loss carryovers to offset realized gains.

In addition, Vanguard international index funds contain both mutual fund share classes and exchange-traded fund share classes. The exchange-traded funds frequently realize in-kind redemption gains. Because in-kind redemption gains are not taxed to the fund or its shareholders, the fund manager will usually select shares with the lowest tax basis for redemption baskets.

Although these gains are not taxed, they are nonetheless included in a fund’s reported annual realized gain. Netting out these non-taxable gains produces the actual taxable gain or actual realized loss. The table below shows the 2019 reported gain or loss realized for each Vanguard international fund, the in-kind redemption gain or loss, and the actual net realized gain or loss.

As an accounting entry, in-kind redemption gains become a part of the fund’s paid-in capital.

Vanguard provides the following information regarding the Global ex US Real Estate Fund:

At October 31, 2019, one shareholder was the record or beneficial owner of 29% of the fund’s net assets. If this shareholder were to redeem its investment in the fund, the redemption might result in an increase in the fund’s expense ratio, cause the fund to incur higher transaction costs, or lead to the realization of taxable capital gains.

FundGain/LossIn-kind redemptionNet Gain/Loss
Total international578,017,0004,407,268,000(3,829,251,000)
FTSE all world ex US(103,722,000.000)420,361,000(1,718,106,000)
Emerging markets(1,612,907,000)105,199,000(1,718,106,000)
ESG international(1,830,000)0(1,830,000)
FTSE all world ex US small91,010,000141,476,000(50,466,000)
Total World825,867,000955,570,000(129,703,000)
Global ex us real estate4,956,0007,763,000(2,807,000)
International div appreciation(23,897,000)0(23,897,000)
International high yield div126,0000126,000

More on loss carryovers

As noted, realized losses cannot be distributed to shareholders. Surplus losses can be “carried over” to subsequent years when they can be used to offset future gains. Prior to 2010, these carryover losses where subject to expiration dates.

The passage of the Regulated Investment Company Act Modernization Act of 2010 stipulated that mutual fund losses could be carried over indefinitely, but these losses must be used before taking any expiring loss carry forwards. As of 2019, all  loss carryovers are no longer subject to expiration dates.

The table below shows each fund’s loss carry forward.

FundTotal loss carryforwards
Total international6,449,980,000
FTSE all world ex US2,125,627,000
Emerging markets10,909,464,000
ESG international1,572,000
FTSE all world ex US small182,025,000
Total World339,988,000
Global ex us real estate244,734,000
International div appreciation41,245,000
International high yield div3,605,000

Given that in-kind redemption helps improve a fund’s tax basis, it is somewhat  helpful to examine a fund’s share class distribution. Most Vanguard index funds have mutual fund share classes (investor shares, lower cost admiral shares, and institutional shares) as well as exchange-traded fund shares. The following table shows the ratio of exchange-traded fund share class assets to total fund share class assets. As one can see, exchange-traded shares represent a majority share of most of Vanguard’s international index funds. The lone exception is the Total International Fund, which has a history dating back to 1994, but only added exchange-traded shares in 2011. In addition, mutual fund shares of the Total International Fund are used in Vanguard’s suites of balanced target date and target risk funds.; the positive investor inflows into these funds  assures a large issuance of Total International mutual fund shares.

FundTotal assetsETF assetsETF/Total assets
Total international397,179,784,00016,292,925,0004.10%
FTSE all world ex US39,153,444,00024,651,560,00062.96%
Emerging markets86,804,065,00063,088,668,00072.68%
ESG international418,414,000418,414,000100.00%
FTSE all world ex US small6,624,722,0005,400,228,00081.52%
Total World17,229,526,00012,121,578,00070.35%
Global ex us real estate6,794,370,0005,944,546,00087.49%
International div appreciation1,523,392,0001,304,960,00085.66%
International high yield div1,462,593,0001,264,332,00086.44%

Foreign tax credit

The annual report reveals the amount of foreign tax a fund has paid during the fiscal year. The foreign tax paid on the fund’s dividend income can qualify for a foreign tax credit on a taxable investor’s tax return. Dividing the foreign tax by a fund’s average net assets provides a percentage estimate of the value of the credit.

FundAverage net assetsForeign taxForeign tax credit
Total international366,659,089,5951,126,012,0000.31%
FTSE all world ex US37,422,223,434120,873,0000.32%
Emerging markets84,085,228,835262,108,0000.31%
ESG international192,954,079720,0000.37%
FTSE all world ex US small6,442,296,99819,109,0000.30%
Total World17,135,456,29424,279,0000.14%
Global ex us real estate6,449,446,34321,135,0000.33%
International div appreciation1,292,123,9412,382,0000.18%
International high yield div1,256,809,1265,774,0000.46%

Security lending

Vanguard international stock index funds  earn additional income by lending securities to qualified institutional borrowers. The firm allocates 100% of after expense  security lending earnings to the fund.

A fund’s expenses are paid out of fund earnings. Given that the US tax code gives a tax preference to dividends that qualify for lower tax rates, it is prudent for fund managers to allocate non-qualified income to fund expenses. The table below shows the amount of security lending income earned by each fund in fiscal year 2019 and calculates its percentage ratio to total annual fund expenses.

FundNet security lending incomeTotal expenses% of expenses
Total international230,079,000422,981,00054.39%
FTSE all world ex US14,347,00031,396,00045.70%
Emerging markets34,713,00089,284,00038.88%
ESG international21,000266,0007.89%
FTSE all world ex US small18,543,0007,757,000239.05%
Total World5,010,00014,684,00034.12%
Global ex us real estate3,162,0007,763,00040.73%
International div appreciation119,0002,499,0004.76%
International high yield div399,0003,318,00012.03%


The annual report documents the rate of annual turnover of its assets by the fund manager. In addition, the reports also document the sales and redemption of fund shares by shareholders. This data allows us to compute a redemption-to-average net assets ratio (R/ANA) that corresponds to a shareholder annual turnover rate. The following table reports the investor sales and redemption in each fund using a composite total of all share classes.

FundAverage net assetsSalesRedemptions
Total international366,659,089,59564,788,396,00042,150,544,000
FTSE all world ex US37,422,223,4347,175,843,0006,054,645,000
Emerging markets84,085,228,83511,274,470,0006,863,714,000
ESG international192,954,079421,388,0000
FTSE all world ex US small6,442,296,9981,976,003,0001,730,990,000
Total World17,135,456,2945,675,396,0005,860,572,000
Global ex us real estate6,449,446,343729,335,000740,521,000
International div appreciation1,292,123,941331,839,00058,326,000
International high yield div1,256,809,126380,800,00056,101,000

The table below provides ratio data for each fund. The turnover percentage documents the fund manager turnover of assets. The R/ANA ratio documents the shareholder turnover of assets. The redemption-to-sales ratio ( R/S ) shows net shareholder purchase or net shareholder redemption in a fund. A ratio less than one shows net purchase; a ratio greater than one shows net redemption. As can be seen, investors executed net redemption in  the Vanguard regional stock index funds (Europe, Pacific) and modest redemption in the Total World and Global ex US Real Estate funds.

The R/ANA and R/S ratios, viewed together, can signal market timing activity within a fund. For example a fund showing an R/ANA ratio of 400% and an R/S ratio of 1 (equal buys and sells) is likely being market timed by fund shareholders.

FundFund TurnoverR/ANAR/S
Total international4%11%0.65
FTSE all world ex US4%16%0.84
Emerging markets9%8%0.61
ESG international22%0%0.00
FTSE all world ex US small17%27%0.88
Total World7%34%1.03
Global ex us real estate7%11%1.02
International div appreciation42%5%0.18
International high yield div15%4%0.15

Transaction costs

Mutual funds buy and sell stocks as investors purchase and liquidate fund shares. Funds also buy and sell shares  in order to track changes in index reconstitution. These transactions incur brokerage commission expense, bid/asks spreads and market index costs.  However, in-kind transactions do not bear these transaction costs. The following table provides the dollar totals of share transactions and in-kind transactions for the funds. The percentage of in-kind transactions to total transactions is also included.

FundPurchasesIn-kind PurchasesPct.SalesIn-kind SalesPct.
Total international57,596,338,0002,542,384,0004.41%23,003,647,0008,967,838,00038.98%
FTSE all world ex US4,374,720,0001,699,566,00038.85%2,607,315,000974,263,00037.37%
Emerging markets12,480,958,0002,410,333,00019.31%7,615,368,000305,559,0004.01%
ESG international462,612,000229,022,00049.51%40,787,00000.00%
FTSE all world ex US small1,766,178,000510,395,00028.90%1,528,665,000471,094,00030.82%
Total World3,581,953,0001,891,562,00052.81%3,579,264,0002,412,689,00067.41%
Global ex us real estate1,049,857,000407,950,00038.86%1,014,467,000553,638,00054.57%
International div appreciation812,147,000219,924,00027.08%529,414,00000.00%
International high yield div511,064,000275,166,00053.84%179,098,00000.00%


  • Table data is derived from fund annual reports. Average net asset data is derived from N-CEN reports on EDGAR. The computations are derived from  this google spreadsheet.
  • The Vanguard Developed Market Index Fund has a fiscal year ending December 31. The annual report is not issued along with Vanguard’s international and global stock funds examined in this report.
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