Do I Need Emerging Markets Stocks?

A reader writes in, asking:

“I currently own Fidelity’s Spartan International Index Fund. I only recently realized that the fund doesn’t own any emerging markets stocks at all. I realized this because I just learned about Fidelity’s new international fund, Spartan Global ex U.S. which does include emerging markets.

Should I switch to the Global ex U.S. fund? Or should I forget about it?

I’m retired and consider myself risk-averse.”

To put it as concisely as possible: It probably doesn’t matter very much.

As a general principle, it usually is beneficial to be as broadly diversified as possible with regard to one’s stock holdings. So, all else being equal, I’d usually be inclined to use the fund that includes an allocation to emerging markets.

But, in this case, all else isn’t equal. This may change in the future, but for the moment, the new Spartan Global ex U.S. fund is slightly more expensive than the Spartan International Index fund: 0.24% expense ratio as compared to 0.11%, according to Morningstar.

Admittedly, that’s not a large difference. But neither is the difference in allocation that you get for the additional cost. According to Morningstar, Fidelity’s Spartan Global ex U.S. fund only has 16.2% of its portfolio invested in emerging markets. (For anyone curious, Vanguard’s Total International Stock Index Fund also has 16.2% in emerging markets.)

If, say, 18% of your portfolio is invested in international stocks (30% of the stocks in a 60/40 stock/bond allocation, perhaps), that would mean we’re only taking about changing 2.9% of your total portfolio (16.2% of 18%). And the change isn’t even from stocks to bonds (or vice versa). It’s from one type of stocks to another type of stocks.

[Side note: Even if we change the assumptions to represent an aggressive investor with a 100%-stock portfolio, half of which is international, we'd still be talking about just over 8% of the portfolio.]

In other words, it’s probably not something you have to worry a great deal about one way or the other.

To give an idea of how similar two such funds can be, here’s the performance of Vanguard Total International Stock Index Fund (with its ~16% emerging markets allocation) as compared to the performance of Fidelity’s Spartan International Index Fund (with 0% emerging markets) from 12/15/2010 (when the Vanguard fund changed to its current index) to 5/3/2012.

It’s the kind of difference that most investors probably wouldn’t even notice — especially if the international allocation is a fairly small part of the overall portfolio.

In short: You can pay slightly more in order to get a slightly more diversified allocation. Or not.