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Total world equity trackers 4 U

A total world equity index tracker simulates the global investment market.

There’s a compelling case to be made that the only equity fund you need is a total world equity tracker, as ex-hedge fund manager turned passive investing champ Lars Kroijer has explained.

But which total world equity index tracker should you actually buy?

The issue is clouded by the usual fog of choice that swirls around every investment decision we make. As many Monevator readers have already noticed, there’s no ACME total world tracker emblazoned with the blurb “Your problems are solved! Buy Me!” to make things easy for you.

Instead there’s a muddy great bank of products that potentially fit the bill.

So let’s cut through the confusion with a quick round-up of the main players and a hoedown on what matters most.

Remember, there is no perfect solution. Rather, there’s a row of me-too products lined up like identical sextuplets.

If you want a white shirt then buy a white shirt. The differences between them are marginal, and mostly a matter of personal comfort.

Total world equity trackers – what really matters?

The idea is to invest in a tracker that mimics the global investable market as far as is practicable.

This strategy is the ultimate expression of the wisdom of the crowd, or, as Lars puts it:

Since the millions of investors who make up the global markets have already moved capital between various international markets efficiently, the international equity portfolio is the best one for anyone without edge.

But notice that word above: practicable.

You can tie yourself in knots fretting that an equity index is not the same as the global investable market – they lop out countries, illiquid small caps, private investment and so on.

Plus most global trackers sample their indexes rather than copying them faithfully.

All true, but a total world equity index tracker is still the cheapest, most diversified, most efficient proxy of the real thing we’ve got.

If you want something better then you’ll end up wasting your days trying to simulate planet Earth like the mice in The Hitchhiker’s Guide To The Galaxy.

And whatever you come up with is going to fall short or get blown up by the Vogons at the vital moment.

So, what matters:

All-World – Most of the products labelled world trackers only encompass developed world countries. They skip the emerging markets, including the likes of China and India. Hardly a dead ringer for the total world then.

So make sure your tracker includes the emerging markets. If you choose a developed world solution then you should also add an emerging market tracker to your portfolio.

Diversification – Following on from the above, check how many equities the rival products include. The more the better, as your tracker will be doing a better job of fulfilling the total part of the brief.

Cost – This is one factor that will definitely impact your returns and it is knowable in advance. In a market where there’s little real difference between products, pick the cheapest. That goes for total world equity index trackers as much as it goes for toothpaste.

But don’t sweat small changes in the cost pecking order. An Ongoing Charge Figure (OCF) differential of 0.1% on £10,000 = £10. That will cost you £50 a year on a £50,000 investment if, for example, your fund’s OCF is 0.35% instead of 0.25%.

Only you know your personal hassle threshold, so try to work out whether the impact of costs over your investing lifetime is worth switching for.

Take a look at tracking difference, too, as part of cost.

ETFs vs index funds – If you’re only investing a few hundred pounds a month then plump for an index fund rather than an Exchange Traded Fund (ETF). Then you can choose a broker that offers commission-free trades and avoid a nasty cost headwind. This is especially important if you want to invest monthly.

Investor compensation – You’re covered for up to £50,000 of loss if your tracker is based in the UK. If it’s based in Ireland – as most ETFs are – then you’re looking at €20,000 max. Note, investor compensation schemes only kick in if your broker or tracker provider goes up in smoke and your money disappears. Stock market losses are not covered!

The index – You should Google the tracker’s index to make sure it’s total world or, if it isn’t, that you know what’s missing. Check your product’s factsheet too.

To quickly check the difference between trackers then try this fund comparison tool. (Sign up required). It lets the curious and diligent drill down into holdings, countries, market caps, sectors and performance. I’ve used it as the basis of the comparison table below.

I wouldn’t worry about the differences between comparable indexes like MSCI World vs FTSE Developed World. Or at least only do so if you know what difference having an extra 1.55% in South Korea or 0.02% in Greece will make to your returns in 10 years time. (And if you know that then you should be running a hedge fund not a DIY passive investing portfolio.)

Total world equity trackers – the rivals

Tracker Cost = OCF (%) Index Emerging Markets (%) No of holdings Domicile
Vanguard FTSE All-World ETF 0.25 FTSE All-World 7.89 2,889 Ireland
SPDR MSCI ACWI ETF 0.4 MSCI All Country World 6.61 915 Ireland
Fidelity Index World W Fund 0.2 MSCI World 1,644 UK
Vanguard LifeStrategy 100 Fund 0.24 LifeStrategy Equity Composite 7 5,894 UK
iShares Core MSCI World ETF 0.2 MSCI World 1,574 Ireland
Vanguard FTSE Developed World ETF 0.18 FTSE Developed 1,970 Ireland

Source: Funds Library

The top two funds are genuine total world equity index trackers and one is considerably cheaper and better diversified than the other.

The Fidelity and LifeStrategy funds are your UK based options. Neither is a true total world index tracker (see below for more on LifeStrategy) but the Vanguard fund holds emerging markets and on most measures is a very strong contender.

The final pair are cheap but developed world only; I’d knock them out on that basis.

Other choices:

  • L&G Global 100 Index Trust – UK based, developed world fund, only 103 stocks.
  • SPDR MSCI ACWI IMI ETF – Very similar to the SPDR ETF above and has actually performed better over five years, though it’s less diversified. Worth checking.
  • db x-trackers MSCI World ETF – OCF 0.19%, very similar to the iShares product but much newer and therefore has a shorter track record.

Read up on how to compare index trackers if you need a refresher.

A world of difference

Funds-of-funds – Technically Vanguard’s LifeStrategy fund shouldn’t be in the table. That’s because Vanguard rebalances its asset allocation according to its own proprietary view rather than giving the market free rein. It’s also a den of home bias, with UK holdings three times greater than the other trackers in the table.

I’ve included it however because it’s still extremely well diversified and is a good UK based fund option. You can also buy LifeStrategy funds with a built-in government bond allocation. It’s truly a one-stop shop portfolio, as Vanguard handles all the rebalancing while you get on with life.

Fixed income – Adding high quality government bonds into the mix is crucial if you’re not to freak out during a stock market crash. Understanding how to build your asset allocation will help you work out how much you need to put in safer assets. You can find some leads on bond funds via our cheap index tracker picks.

Income versus accumulation – All the funds come in both flavours. Things are more patchy with the ETFs but concentrate on getting the right product first, don’t let the tail wag the dog.

Dev world ex-UK – I knocked out these trackers, as it makes no sense to skip the UK when you’re trying to mimic the world. The same is true for emerging markets.

KISS

The beauty of the one-tracker strategy is its simplicity.

Yes, you could shave away a little cost by building a similar portfolio from separate regional trackers.

But is that worth the time and dealing fees aggro?

Can you trust yourself to stay in line with whatever the world market dictates?

Or will you justify trimming back on Japan or the US or wherever because you can apparently spot the bubble that everyone else has missed?

Fill your boots if you need the control, but don’t do it because you feel you have to.

Nobody can predict which strategy will win over your investment lifetime. But putting a total world index equity tracker at the core of your asset allocation is a rational choice in an insane world.

Take it steady,

The Accumulator

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{ 113 comments… add one }
  • 101 Alex P July 18, 2017, 4:26 pm

    If that’s your view then you’ve answered your own question. The recommendation of a global equity tracker is for people who have concluded that they don’t have the edge to form a view such as yours. So, examine your convictions and act accordingly!

    I wonder whether you are blurring the well-known ability of the USA to recover fast from recession in the short term with the likelihood of structural growth over the long term. I would have thought that Emerging Markets offer some pretty serious potential here if you are talking 50 years.

    For my part, my passive portfolio is basically 25% ftse global all cap, 15% vg EM stock index fund, and then 10% in each of the following: VG’s global small cap, all 4 of VG’s active factor funds and a global commercial property index fund. Can’t explain why.

  • 102 ABC123 July 18, 2017, 4:54 pm

    Warren Buffet said….all you need is an S&P 500 tracker fund to take care of your lifetime investing (or words to that effect).

  • 103 The Accumulator July 18, 2017, 8:37 pm

    The idea is to diversify rather than place all your bets on one part of the world. Moreover, equity performance is poorly correlated with the economic performance of countries. If everyone believes US stocks are set to dominate, then they’re likely to be over-bid, a recipe for disappointing future performance.

  • 104 Adrian July 18, 2017, 8:49 pm

    Did Buffett declare an interest when he said that? 🙂

    Seriously though I’m not sure I see the point of a total world tracker since don’t all the other major players suffer/prosper at exactly the same time as the US market? So it doesn’t seem like risk is reduced in any way or increased growth likely. Take VWRL…
    It’s 52% US and the majority of the rest of the countries represented will surely go down the swanee with our American cousins when the crash comes. 2.4% China and 1.1% India aren’t going to help much.

  • 105 uhm July 18, 2017, 10:05 pm

    Adrian:
    I nearly agree with you on this US dominance argument. Lets face it, the only other country which came close to – and even momentarily overtook – the US in GDP output was Japan in the late 1980’s. And look what happened to their stock market soon after those peaks – emphasis on stock market, not economic performance (The Accumulator), as Japan continued to be the world’s second largest economy for many years after its stock market peaked.

    Where are the rivals to Google, Apple, Microsoft, Amazon, Netflix, Tesla, Uber, Cisco, eBay, Facebook, Coca Cola, McDonalds, elsewhere in the world?
    But I don’t completely agree with this argument as I invest in all-world trackers and not US only. It’s a strong argument nonetheless.

  • 106 Adrian July 18, 2017, 10:44 pm

    I do think that there is something fundamentally healthy about spreading it around. I’m transferring my ISA to Vanguard – when the cash appears I’m pondering 50% in VLS40, 25% in US equities, 25% in one of their world trackers. I’ll then drip feed into the VLS40 to gradually increase bond exposure.

  • 107 The Accumulator July 19, 2017, 6:32 pm

    It’s not about the rest of the world catching a cold when America sneezes. It’s about not chasing performance, not assuming current trends will last, not believing you can predict the future or banking on a good story.

    There have been many periods – as US passive grandees like Bernstein and Swedroe consistently point out – when the World ex US has outperformed US.

    For the last several years the US has outperformed the ROW.

    That creates a classic investing trap:

    Projecting current trends into the future and assuming they can’t change.

    Chasing performance – investing in what’s hot now.

    Little realising that sound returns are made by investing in the lesser lights.

    I repeat: if the US is richly valued then odds are that future expected returns disappoint. The languishing parts of the world are where value likely lies. They have scope to surprise to the upside.

    Remember, it doesn’t matter if Facebook earns billions in the future. You will only benefit as an investor if it earns more than expected. If it earns a little less then share price falls.

    @ Uhm – over the last 16 years the US was hammered by South Africa, sans all the famous brands we can all instantly think of – availability bias.

  • 108 The Investor July 19, 2017, 7:12 pm

    In addition to TA’s points about fluctuating performance and recency biases (i.e. projecting current trends) take a look at the two pie charts in the article below, and ideally read the words. 😉

    http://monevator.com/investing-for-beginners-the-global-stock-market/

    The US dominance of the 20th Century and its growth to the current 52% share of world equity markets was not preordained. If people knew it was going to happen they would have bid up its companies and markets many decades before. History unfolds. 🙂

    Another fun thing to do is hunt around on this site and others around 2010-2012, when we were regularly fielding comments from readers saying why not put 50% (or whatever) into emerging market trackers, since they were obviously the future and the US and Europe were clearly on their knees, in both stock market and economic terms.

    People were leaving the US market for dead. Plus ça change! 🙂

  • 109 uhm July 19, 2017, 9:30 pm

    The Investor: Very true – I remember that well and was one of those thinking that way for a while. Eventually I saw that the US stock market (and economy) was really back on track and doing so much better than the “emerging markets” everyone was meant to be piling into – especially more so against the “BRICS” – remember them? I realised I had been taken in by the hype and was lucky to sell out of some of this excess EM holding just in time. I still have emerging market equities, but only in approximate proportion to their global representation. The hype of that time time taught me to stick with the global market and that I have no edge whatsoever, as Lars Krojher might say.

  • 110 Adrian July 20, 2017, 8:06 am

    Really interesting responses. This is a great site.

    What’s the view on including ETFs in commodities (e.g. gold) and property – so as to have a portfolio that has stakes in all the world’s investments?

  • 111 The Accumulator July 20, 2017, 5:59 pm

    Yes a tilt to property makes sense from a diversification point of view. Again the effect is a gradual one over time. It won’t rescue anyone in a crash scenario. Gold – a bit more controversial. Level-headed commentators vary in opinion: anywhere from fuggedaboutit to 5% of portfolio. The Investor has a few nuggets I seem to remember whereas I steer clear on the grounds that it’s not a productive asset i.e. doesn’t deliver a cashflow, you’re relying on the greater fool effect.

  • 112 Adrian July 21, 2017, 10:15 pm

    Vanguard offer an ETF and a fund with very similar geographical distributions and similar annual charge:
    FTSE All-World UCITS ETF (VWRL)
    FTSE Global All Cap Index Fund – Accumulation

    The fund charge is 0.01% less than the ETF which I guess is neither here nor there. But what catches the eye is the that the fund has 4788 stocks compared to the ETF’s 2977. However the ETF is nearly up with it’s benchmark whereas the fund is well behind – the fund is relatively new though (launched November ’16) and only £38m is size.

  • 113 dearieme July 22, 2017, 12:58 pm

    @Adrian: “ETFs in commodities (e.g. gold) and property” – we hold some gold and silver (ETCs), cash, and ILSCs. We do this because various discussions on the internet have persuaded me that our house is equity-like, and our DB and state pensions are bond-like. Both these assets are far larger in value than our investable money, so the latter provides diversification and liquidity by being largely in non-equity and non-bonds. I do consider P2P, infrastructure, and commercial property, but haven’t yet taken the plunge. If the next couple of years (or months) bring a market crash then we might well buy more equity.

    If we were younger we probably wouldn’t invest like this. At least, when we were younger we did not invest like this.

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