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Fund Spy

The Two Best New ETFs of 2007 (So Far)

Vanguard and State Street's two total international-stock funds look solid.

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Until recently there haven't been many broadly diversified international-stock exchange-traded funds to choose from. Two new funds from State Street Global Advisors and Vanguard have changed that, and they're a long overdue addition to investors' toolkits.

Not the Only Flame in Town
For more than five years,  iShares MSCI EAFE (EFA) has had the playing field to itself. Few ETFs competed with it to provide core foreign-stock exposure, and those that did all lacked something. BLDRS Developed Markets 100 ADR Index (ADRD) had too much Europe and not enough Asia.  WisdomTree DIEFA (DWM) tracked a new, unproven dividend-weighted index and charged a higher expense ratio. Consequently, iShares MSCI EAFE got the lion's share of the assets. The $39.3 billion ETF is nearly 200 times the size of the next largest rival foreign large-blend ETF and one of the largest international funds of any stripe.

IShares MSCI EAFE does have some positive attributes. As my colleague Gregg Wolper points out in his analysis of the ETF, for a reasonable price iShares MSCI EAFE tracks the most recognized benchmark for non-U.S. stocks and provides instant diversification among many countries in several regions, as well as across different sectors. But the ETF and its benchmark also lack a couple things. The MSCI EAFE has virtually no small-cap exposure and ignores emerging-markets companies as well as those in Canada. Investors wanting to index the entire foreign market with ETFs have had to use emerging-markets or regional or single country funds to make up the difference, incurring more transaction costs and portfolio maintenance hassles as they did so.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.