TSP I Fund

The TSP I Fund is an international stock index fund that tracks the investment performance of the Morgan Stanley Capital International ACWI IMI ex USA ex China ex Hong Kong Index. That’s a mouthful, but in practice it means that by making an investment in the I Fund, you own a small slice of approximately 5,600 international (non-US) companies, diversified across 21 Developed Markets (DM) countries and 23 Emerging Markets (EM) countries. With an annual expense ratio of 0.054%, the TSP I Fund is a very low cost way to gain diversified exposure to the international stock market. The list of DM countries that the I Fund invests in include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. And EM countries include: Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As the index name implies, notable exclusions are China and Hong Kong.

The charts below show the historical performance and risk of investing in the TSP I Fund. As of 12/20/2024, the fund has a compound annual growth rate of 5.7%, annualized standard deviation of 17.5%, and Sharpe Ratio of 0.17. An initial investment of $1,000 on 8/31/1990 would today be worth $6,745:

The chart below shows the historical drawdowns for the TSP I Fund. The worst drawdown since inception was -60.9%:

Your investment in the TSP I Fund is subject to significant stock market risk (it 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 the S Fund. The efficient market theory would dictate that in the long run, investors will "get paid" for taking on this extra risk, though this has not been true in recent years.

The 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 I Fund 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.

How to use the I Fund in a TSP account

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.

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.

Digging a little deeper under the hood of the I Fund, you will find that about half of its assets are invested in 5 countries: Japan, United Kingdom, Canada, France, and Switzerland. This is because the fund follows a market capitalization weighted index (rather than an equal weight index). In other words, the fund disproportionately invests in countries with larger total stock market capitalizations. While this approach is logical on the surface, it introduces potential imbalances. For example, over 17% of the I Fund assets are currently invested in Japanese companies. Despite Japan's declining population, its stock market maintains substantial market capitalization, raising questions about the long-term growth prospects (and valuation) of Japanese companies.

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.

History of the I Fund

Up until 2023, the I Fund tracked a different index, the MSCI EAFE, which contained approximately 790 stocks in 21 Developed Markets countries — Mostly Japan and Europe. It specifically did not include Canada or any Emerging Markets (EM) countries. While the added diversification in EM countries in the 2024 update of the I Fund was much needed, the exclusion of China and Hong Kong appears to have been (at least in part) a political decision by the US Congress (for example see S.1665: Prohibiting TSP Investment in China Act). TSP investors who seek total international diversification will therefore have to look elsewhere to gain exposure to China and Hong Kong. As of this writing, the China exposure in truly diversified international funds is approximately 7%, and 1.4% for Hong Kong. Investment options for those who want to make up for this missing exposure outside of the TSP include iShares MSCI China ETF (MCHI) and iShares MSCI Hong Kong ETF (EWH) — keeping in mind that just a small slice will do the trick: for every $10,000 invested in the I Fund, $700 in MCHI and $140 in EWH will provide the country exposure you would receive in a truly diversified international fund like the Vanguard Total International Stock ETF (VXUS). Another option would be to buy an emerging markets mutual fund in the TSP Mutual Fund Window.