MurrayColeman

SAN FRANCISCO (MarketWatch) — The Vanguard Group is proposing a new index mutual-fund that on the surface looks a lot like its already popular Total International Stock Index Fund.

The mutual-fund giant on Friday filed with the Securities and Exchange Commission to offer a new foreign fund that tracks the FTSE All-World ex-USA Index. That’s a benchmark which includes some 2,000 different large-cap and mid-cap stocks in 48 different countries, both developed and emerging.

On first glance, the new fund might seem redundant to Vanguard’s 10-year-old Total International Stock Index Fund VGTSX, -0.82%

The two are similar in some ways, says Amy Chain, a Vanguard spokesperson. But the funds differ in both allocations between countries and structure, she said.

The $18.2 billion Total International Stock Index Fund is a fund-of-funds. About 60% of its assets are invested in the Vanguard European Stock Index Fund VEURX, -0.66% Another 26% is allocated to the Vanguard Pacific Stock Index Fund VPACX, -0.78% The final allocation, some 15%, goes into the Vanguard Emerging Markets Stock Index Fund VEIEX, -1.31%

The new fund will differ slightly in allocations between those markets (from Total International), Chain said, noting the FTSE-based foreign index fund still must be approved by the SEC.

The biggest change in the new fund’s allocation compared to its older cousin would be introduction of investments in Canada’s stock market. Currently, that amounts to about 5% of the FTSE benchmark’s total assets.

The FTSE index also has minor differences in European investments, with about 55% of its assets now going to those markets. It also has about 1% less going into Pacific region markets. Emerging markets exposure will remain about the same in both funds, says Chain.

On the new fund we’re going to be able to launch investor, institutional and exchange-traded fund share classes, she added.

As a fund-of-funds, Vanguard wasn’t able to create different share classes for the Total International Stock Index Fund. The single-fund structure of this new offering will enable Vanguard to provide different share classes, Chain said.

Vanguard is expecting to launch the new international index fund in the first quarter of 2007. As with its other existing 65 index mutual-funds, the new FTSE international fund will be weighted by market-cap size.

A fund-of-funds format also means U.S. investors can’t receive foreign tax credits. Only individual funds are eligible for such a reimbursement, says Scott Salaske, a Troy, Mich.-based money manager.

So that can be a disadvantage for someone with a taxable account, he said.

When working with high net-worth investors, he’s been avoiding Vanguard Total International Stock Index Fund in taxable accounts.

Foreign tax credits don’t typically amount to much, Salaske said. But it can be a rather painless and easy way to add a little extra to your returns.

Individual funds investing overseas, such as Vanguard’s European Stock Index Fund and Pacific Stock Index Fund, are entitled to get a rebate on foreign taxes paid in foreign markets. So would its new FTSE index fund.

Still, providing a slice of Canada with some slight foreign tax credit advantages isn’t enough to separate the new fund from Vanguard’s Total International fund, Salaske says.

My guess is that the real incentive for Vanguard is to come out with a well-diversified international index fund that can be offered as an ETF, he added. That’s where a lot of the industry’s growth is going to come from in the future.

Allan Roth disagrees. Vanguard is certainly gaining a lot more exposure to a broader range of investors by coming out with a fund that can be offered as an ETF, said the Colorado Springs, Colo.-based adviser. But you can’t downplay the importance of giving investors broad exposure to Canada.

The country has a lot of exposure to mining and precious metals. It’s a significant market to own, Roth said. And no other broad international index fund today includes Canada. So this new Vanguard fund would provide more diversification than anything else on the market other than more specialized country specific funds.