The TSP I Fund is an international stock index fund that seeks to track the investment performance of the Morgan Stanley Capital International Europe, Australasia, and Far East Index, also known as the MSCI EAFE. The EAFE index contains about 950 international large-company stocks from 21 developed markets: 16 countries in Europe and 5 in the Pacific Rim. The index is broadly diversified, and it's designed to include at least 85% of the market value of each industry group within member countries. You can think of the EAFE index as an international version of the S&P 500 that includes all developed countries except Canada and the U.S.
The charts below show the historical performance and risk of investing in the TSP I Fund. As of 5/23/2018, the fund has a compound annual growth rate of 6.0%, annualized standard deviation of 17.6%, and Sharpe Ratio of 0.16. An initial investment of $1,000 on 8/31/1990 would today be worth $5,018:
The chart below shows the historical drawdowns for the TSP I Fund. The worst drawdown since inception was -60.9%:
The MSCI EAFE index is widely followed, and aside from the TSP I Fund, there are many other mutual funds and ETFs that track it. Popular examples include Vanguard's Developed Markets Index Fund (VDMIX), iShares MSCI EAFE Index Fund (EFA), and the Vanguard MSCI EAFE ETF (VEA). With an annual expense ratio of 0.025%, the TSP I Fund is a very low cost way to gain diversified exposure to the international stock market. To put this in perspective, the expense ratio of the above mentioned Vanguard and iShares funds is between 4.8 and 13.6 times larger than that of the TSP I Fund!
Your investment in the TSP I Fund is subject to stock market risk (because the MSCI EAFE index returns will rise and fall during bull and bear markets). As can be seen from the performance charts and statistics above, the I Fund is more volatile (higher risk) than the C Fund or even the S Fund. The efficient market theory would dictate that in the long run, investors will "get paid" for taking on this extra risk.
The EAFE index and I Fund returns are also exposed to currency risk: index prices will rise or fall as the value of the U.S. dollar decreases or increases relative to the value of the currencies of the countries represented in the EAFE index. Depending on your point of view, this "currency risk" may be a welcome source of currency diversification. (The U.S. dollar has generally been trending lower against other major world currencies since the mid-1980s. That being said, past trends don't tell us anything about where the dollar might go next).
Since the I Fund is passively managed, it remains fully invested during all market cycles and economic conditions. Although stocks have historically proved to be a good hedge against inflation, there's no guarantee that an investment in the I Fund will grow enough to offset inflation in the future.
While investing in stocks is risky (and the I Fund is no exception), it also offers the opportunity to experience gains from equity ownership of companies outside the United States. Since the I Fund holds the stocks of companies in many international countries, it's an excellent way to diversify the stock portion of your TSP portfolio.
In the long run, stocks have outpaced many other types of investments, so an allocation to stocks makes sense for investors interested in growth of investment capital. Owning shares in all three TSP stock funds (the C Fund, S Fund, and I Fund) results in a more globally diversified stock portfolio.The prices of domestic and international stock markets don't always move in tandem, and by investing in all of them, you reduce your exposure to stock market risk.
Emerging Markets stocks are not included in the EAFE Index used by the I Fund. For a truly diversified global stock portfolio, Thrift Savings Plan investors with assets outside of the TSP should consider investing in an emerging market stock fund to complement their TSP international holdings. A good candidate is the Vanguard MSCI Emerging Markets ETF (VWO). Emerging Markets are expanding into an ever larger share of the global stock market capitalization. Hopefully at some point in the future, the TSP will add an Emerging Markets index fund, to enable investment in this growing area.
In addition to owning stock funds, TSP investors should consider bond funds like the TSP F Fund, since the prices of bonds are often uncorrelated or inversely correlated to stocks, providing a welcome buffer during market downturns, and reducing the overall volatility of an investment portfolio.
In our tactical asset allocation strategies, we dynamically allocate a portion of investable assets to the TSP I Fund, based on the prevailing market conditions.
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