Vanguard has taken out its wrench and tinkered with its Total International Stock Index Fund (VGTSX) by throwing out the fund-of-funds concept and investing in individual stocks.

Now, could an exchange-traded funds version be close behind?

Vanguard insists that's not the reason for its decision to make changes to the pioneering mutual fund's portfolio.

"We already offer two really well-diversified international ETFs, so I don't think we have any plans to offer this as an ETF," said Vanguard spokesperson Rebecca Cohen.

Vanguard's two internationally diversified ETFs are the FTSE All-World ex-US ETF (AMEX: VEU) and the EuroPacific ETF (AMEX: VEA). Both have done well attracting assets and rank among the top 10 largest international ETFs.

Vanguard also offers four others: an Emerging Markets ETF (AMEX: VWO), the European Stock ETF (AMEX: VGK), the Pacific Stock ETF (AMEX: VPL) and the Total World Stock ETF (NYSEArca: VT), which holds 42% in U.S. stock. Each is down more than 15% year-to-date, in line with the performance of VGTSX.

But even with its already robust lineup, that's not to say a Total International ETF couldn't happen, say observers. After all, Vanguard holds a patent protecting its use of forming a second share class for ETFs. That's not only a relatively low-cost and painless way to launch new ETFs, it also gives new portfolios instant brand recognition.

"They can easily make it an ETF," said Herb Morgan, chief executive at Efficient Market Advisors in Del Mar, Calif. "I think it would only follow that they do an ETF."

If an ETF were to come in the future, it would be an inviting player in the international ETF marketplace.

Asset Magnet

"Anything that Vanguard launches that's broad-based would attract assets," Morgan said.

From a purely investment perspective, investors could cobble together the three existing ETFs that formed the Total International's portfolio as a fund-of-funds in much the same manner. And no doubt many are doing just that, combining VWO, VGK and VPL. Or, VWO could be used in tandem with VEA. Another possibility is simply to hold VEU, which is almost identical to the portfolio of VGTSX except that the ETF fund includes Canada.

So why a Total International Stock clone in ETF form?

One reason would be ease of use. There's certainly an argument to be made for investors with VGTSX in their retirement plans looking to add more money into a taxable account or IRA. Using an ETF that's likely to be even cheaper, yet exactly replicates the existing mutual fund, would be an attractive option.

Also, existing VGTSX investors could simply switch share classes into the new ETF. That could essentially give the old mutual fund a fresh appeal and attract a whole new set of investors.

But perhaps even more appealing to Vanguard from a business perspective is that a Total International Stock ETF would present more direct competition to market leader iShares MSCI EAFE (NYSEArca: EFA). It's the largest broadly diversified international ETF, with $43 billion in assets.

That would be an interesting matchup considering that an ETF share class of VGTSX would present more diversification under a single umbrella than EFA since it would also include some emerging markets exposure. EFA sticks to the EAFE index, which covers the world's developed markets outside the U.S.

But at least for now, Vanguard is casting the changes to its popular mutual fund as simply tweaks to an already finely tuned portfolio.

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