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I am considering switching my international holding from VXUS to DLEUX. What prompts me to consider this is that I am pleased with my holding in DSENX (DLEUX's "cousin"). I know that DLEUX isn't as diversified as VXUS. Thoughts? Thanks!
(Remarkably, it is still possible to coax this data out of M*.)
DLEUX gets its equity exposure from swaps. This frees up its cash to invest 100% of the NAV in bonds. So for every dollar you invest, the fund's got about $2 of exposure to securities.
As the prospectus states: " Fund’s total investment exposure (direct investments in debt securities plus notional exposure to the Index) will typically be equal to approximately 200% of the Fund’s net asset value."
Having less diversification can sometimes be ignored, e.g. S&P 600 vs. Russell 2000. Sometimes it's desired (concentrated portfolios). But here, the change would not be merely greater concentration, but a big change in focus.
DLEUX's index covers primarily large/mid cap European companies. This switch would get rid of all exposure to small caps and to emerging markets and even to all the developed countries outside of Europe, including Japan, S. Korea, Israel, HK, Taiwan, Australia, NZ, and Canada.
To put it another way, only 40% of VTIAX/VXUS is invested in developed Europe. You'd be jettisoning the other 60% of the world. I've owned a European fund, so I'm not averse to it. I'm just pointing out that, for several reasons, this change would be more than just switching one international fund for another.
Do it because large European companies are where you want to put your money (and because you want some leverage), not because DSENX has done well.
I too put lotsa moneys into DLEUX (close to its start) based on DSEEX performance, but over time it turned out to be quite wanting, only recently matching or outperforming peers, and so I bailed when it went above breakeven.
Were I intent on maintaining a broad, intl equity exposure here (I'm not), I'd probably favor EFAV (a DM min-vol ETF). Or pair EFAV with EEMV in a 60/40 ratio. Doing so tamps down volatility vs DLEUX (& VXUS), without sacrificing returns. (In fact the min-vol pairing and EFAV alone both produced greater returns than DLEUX from its inception.
Huh. DLEUX as sort of a subset or component of VXUS has been discussed, and when their graphs are overlaid any customer would see congruence that does not have to do with chance.
DLEUX doesn't correlate as well to either of them, but it still correlates more closely to the Europe index (0.92), than to the total int'l index (0.87).
Here's the correlation matrix, and the PV page showing graphs of the three funds. Scroll down the page to see the graphs.
To paraphrase Sesame Street, one of these curves is not like the others.
Here's another numeric representation, which may illustrate what I'm saying. It's the correlation matrix between a total international index fund (VTIAX/VXUS), a developed market index fund (VTMGX/VEA), a developed market ex-Canada (EAFE) index fund (MAIIX), a developed Europe index fund (VEUSX/VKG), a developed Pacific index fund (VPADX/VPL), and DLEUX.
Like the frog in boiling water, I've arranged these (except for the Pacific fund) in order of incremental changes. They go from a fund covering all regions and sizes of companies outside the US to one that excludes emerging markets, to one that also excludes Canada, to a pure European one (i.e. also excluding Asia).
For comparison, a pure Asian developed market index is included, as is DLEUX.
Rather than post the correlation coefficients, I'll give the R^2 values, since this is the statistic that is supposed to show what percentage of variation in one fund is "explained" by change in another fund.
The R^2 values for DLEUX relative to the other funds are:
Total Int'l (VTIAX): 76%
Developed Mkts (VTMGX): 76%
EAFE (MAIIX): 79%
Developed Europe (VEUSX): 85%
Developed Asia (VPADX): 55%
Clearly, the more of the world outside of Europe that is discarded, the more the portfolio behaves like DLEUX. I don't consider an R^2 of 76% to be especially good, but your lying eyes may tell you something different.