If you are constructing your own portfolio and like the idea of low-cost, passively-managed index funds, you should definitely be aware that just two ETFs that can provide you diversified exposure to stocks worldwide and all at rock-bottom fees. Given how many choices there are out there today, I cant assume that everyone knows about these already.

The Vanguard Total US Stock index fund invests in over 3,000 stocks that represent the entire U.S. stock market, from small-cap to large-cap companies. The smallest company on their holding list is 100 shares of Qualstar Corp, worth a mere $200. The entire company is worth about $20 million. Compare that to the largest holding of Apple, worth $380 billion (thats 19,000 times larger). The ETF and Admiral shares have a mere 0.07% expense ratio ($7 annually per $10,000 invested), which is taken out in tiny amounts daily out of the funds net asset value. Thats just 6% of what the average mutual fund charges. There are three versions:

• Vanguard Total Stock Market ETF (VTI )
• Vanguard Total Stock Market Index Fund Investor Shares (VTSMX )
• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX )

The Vanguard Total International Stock index fund invests in over 6,000 stocks that covers 98% of the worlds investable markets excluding the US (ex-US). This includes 44 countries from the European, Pacific, and emerging market regions, as well as Canada. The fund also includes both small-cap and large-cap companies from these countries. The ETF and Admiral shares charge a 0.20% expense ratio. Three versions as well:

• Vanguard Total International Stock ETF (VXUS )
• Vanguard Total International Stock Index Fund Investor Shares (VGTSX )
• Vanguard Total International Stock Index Fund Admiral Shares (VTIAX )

This graphic shows you how these two funds relate to other Vanguard ETFs you may already be aware of:

(Source. brighter red text is added by me)

(I should also mention that there is the Vanguard Total World Stock ETF (VT). which covers the entire world in one tidy fund. However, it only holds 2,904 stocks total, which is nearly 2/3rds less than a VTI/VXUS combo. On top of that, it charges a 0.25% expense ratio, which is nearly double how much a VTI/VXUS combo would cost when weighted appropriately. I personally think the added diversification and lower cost is worth the hassle of owning two separate funds.)

Implementation

As of August 31, 2011, the world market value breaks down to about 42% US and 58% Ex-US. For simplicity, I chose to own VTI and VXUS in a simple 50/50 ratio as part of my target asset allocation. I rebalance back to 50/50 regularly using new cashflows, and also at least once annually. Bonds are a separate discussion.

Side note: The reason I thought of writing this is that I previously held Vanguard FTSE All-World ex-US ETF (VEU ) as my primary international holding, which as you can see above is a subset of VXUS, but realize that VXUS only arrived earlier this year. Ive shifted most things over already, but I have been hesitant to sell some of my taxable holdings because Id owe capital gains taxes. I noticed yesterday that I am actually at slight loss now (yay?), so I am able to do some tax-loss harvesting by selling my VEU and swapping it for VXUS. Since they are not substantially identical funds, I am not subject to wash sale rules .