When you see stories about extraordinary growth in China, India and other burgeoning economic superpowers, you no doubt assume that you are participating in that growth if you are invested in the Thrift Savings Plan’s I Fund. Unfortunately, that is not the case because the TSP I Fund is badly flawed as the only option which government employees and service members have for international exposure in their Thrift Savings Plan. There are still some circumstances in which the TSP I Fund will fit into your TSP strategy, but it is much more complicated than picking a percentage to allocate so you have “some international exposure.”
The TSP I Fund (sometimes referred to as the TSP International Fund) tracks the MSCI EAFE Index which was created in 1969 to track the largest stocks in Europe, Australasia, and the Far East (EAFE). Back in 1969 when international investing was just becoming a reality, the dominant international markets were in Europe and Japan. Unfortunately for Thrift Savings Plan investors, the index hasn’t changed since it was created, and European markets still comprise about 70% of the index followed by Japanese markets at 22%, for a total of 92% of the entire index. Those are both still big markets, but they don’t have the growth of China, India, Brazil and the rest of the engines of global growth in the developing world which are completely excluded from the TSP I Fund. And to make things worse, the index tracked by the TSP I Fund includes such basket cases as Italy, Portugal, and Spain.
The TSP I Fund has a place in my TSP allocation strategy, but that determination is based on a different business cycle than the US business cycle which we use to determine our other Thrift Savings Plan allocations. In fact, it relies on a combination of multiple business cycles: the major European countries and Japanese cycles. A lot of TSP talk superficially revolves around the need to have international exposure, but it very seldom goes any deeper to examine what international exposure the TSP I Fund actually provides.
The MSCI EAFE Index is weighted by market capitalization, which means that stocks are purchased for the TSP I Fund’s portfolio in proportion to how large the companies are. That means that the index is skewed strongly towards a few very large companies – in fact 15% of all the shares held in the TSP I Fund are from just ten companies. Which means smaller cap companies are almost completely excluded, and the TSP I Fund will perform best when both Europe and Japan are in the Mid (Growth) Phase of the business cycle. For the purpose of determining the best TSP fund combination at any given time, think of the TSP I Fund as a C Fund for Japan, the UK, Germany, France, and Switzerland.
The TSP I Fund as a Buy-and-Hold Candidate
The MSCI EAFE Index was created to track developed markets under the theory that they are more mature and stable than the newer markets, but Vanguard rates its Developed Markets Index Fund (a mutual fund which is virtually indistinguishable from the TSP I Fund) as “High Risk”. Take a look at the volatility it has displayed since 2001:
Anyone who thinks that the TSP I Fund is a buy-and-hold-forever candidate should take a look at the following chart – if you had put your money to work in the I Fund in 2008 you would still be down about 22% for your trouble (as of July 2013 when this post was written).
And comparing the buy-and-hold-forever performance of the TSP I Fund to the other funds (data from 8/31/1990 to 07/17/2015), take a look at the hypothetical performance of $10,000 invested in each Thrift Savings Plan fund continuously for the past 25 years:
- TSP S Fund: $143,930
- TSP C Fund: $111, 430
- TSP F Fund: $ 47,770
- TSP I Fund: $ 42,710
- TSP G Fund: $ 32,850
Mutual Fund and ETF Equivalents to the TSP I Fund
For anyone interested in investing in non-TSP equivalents to the TSP I FUND, Vanguard has its low expense Developed Markets Index mutual fund (ticker symbol VDVIX) and an ETF (exchange traded fund) which track the MSCI EAFE Index (ticker symbol VEA), both of which are excellent proxies for the TSP I Fund. iShares also has an EAFE ETF as well (ticker symbol EFA), but when last I checked its expenses were triple that of the Vanguard ETF so there would be no reason to purchase that product unless that was the only option in a 401K.
Recommended Reading for International Investing
If you want to read more about international investing specifically, the only book on my shelf or Kindle which I can think of worth recommending is Own the Globe: How Smart Investors Create Global Portfolios, by Aaron Anderson. If you know of another worth taking a look at, please let us know by sharing in the comments below.
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