A global tracker fund takes care of all your equity diversification needs in a single investment product. In this post, we’ll explain how to choose the best global tracker fund for you and we’ll list our picks from the choices on offer.
What is a tracker fund?
A tracker fund is an investment fund that tracks an index like the S&P 500 for the US or, in the case of a global tracker, an index such as the FTSE All World.
Your money is pooled alongside the global tracker’s many other participants. Together this capital is invested by the fund’s management team into every major stock market on the planet.
As an investor in an index fund, you effectively get a slice of ownership in thousands of world-class firms. As a result you buy into the prospects of entire industries, countries, and continents at a stroke.
The index followed by a global tracker fund is essentially an international league table of the world’s leading companies, from Amazon to Shell to Taiwanese semiconductor giant TSMC.
Global tracker funds trade stocks to replicate their chosen index as faithfully as possible. The index meanwhile is driven by the fortunes of its constituent firms. Over the long-term, company valuations rise and fall consonant with their performance, investor sentiment, and global capital’s best estimate of their future earnings.
Investing this way is known as index investing or passive investing. It is the best strategy to choose in order to maximise your chances of meeting your financial goals.
Investing giants like Warren Buffet recommend index funds. Even ex-hedge fund managers have switched sides and urge everyday investors to pick global index trackers.
Global tracker funds – what really matters?
All-World – Most products labelled world index funds only encompass developed world countries. They skip the emerging markets, including the likes of China and India.
Such ‘world index trackers’ are less representative of the global economy. Instead look for ‘All-World’ or ‘Global’ index funds that include emerging markets.
Alternatively, if you do choose a developed world solution, you can add an emerging market index fund to your portfolio to make up the difference.
Diversification – Following on from the above, compare how many stocks your shortlist of global tracker funds includes. The more the better, because your index fund will then do a better job of representing the global stock markets that it follows.
Cost – This is the most important factor that will impact your returns and that you can control. There’s often little performance differential between global index trackers. If in doubt, pick the cheapest by Ongoing Charge Figure (OCF) / Total Expense Ratio (TER).
Reassuringly expensive price tags will not secure you a superior global equity tracker fund. Go for cheap, plain vanilla flavour trackers. Don’t worry about bells and whistles.
Don’t fret about small changes in cost, either. An OCF differential of 0.1% on £10,000 is just £10. That would cost you £50 a year on a £50,000 investment if, for example, your fund’s OCF is 0.25% instead of 0.15%.
Only you know your personal hassle threshold. Try to work out whether the impact of costs over your investing lifetime is worth switching.
Investor compensation – You’re covered for up to £85,000 if your global index fund is based in the UK. ETFs are not included. Note, investor compensation schemes only kick in if your broker or fund manager goes bust and your money disappears. Stock market losses are not covered!
The index – You should Google the tracker’s index to make sure it’s truly global. If it isn’t, find out what’s missing. Check your product’s factsheet, too.
Global index fund or global ETF?
ETFs and index funds are both types of index tracker. They’re both excellent ways of quickly diversifying your investments across the globe for an amazingly low cost.
We’re equally happy using ETFs or index funds and include both in our best global tracker fund table below.
The only time the fund type is a deal breaker is if:
- Your stockbroker charges an ETF dealing fee that costs more than 1% of your typical transaction value.
- The same broker allows you to trade index funds for free.
In that case, we’d invest in a global index fund in preference to the global ETF. That’s because the impact of a high dealing fee is surprisingly damaging over the long-term.
See our cheap broker comparison table for more. Percentage fee brokers often allow you to trade global index funds for nothing.
A few brokers also enable you to trade global equity ETFs for £0. Check out InvestEngine, Freetrade, and Vanguard for that option.
Best global tracker funds – compared
| Tracker | Cost = OCF (%) | Index | Emerging Markets (%) | No of holdings | Domicile |
| HSBC FTSE All-World Index Fund C | 0.13 | FTSE All-World | 8.5 | 3,530 | UK |
| SPDR MSCI ACWI IMI ETF | 0.17 | MSCI ACWI IMI | 7.5 | 1,970 | Ireland |
| iShares MSCI ACWI ETF | 0.2 | MSCI All Country World (ACWI) | 8 | 1,702 | Ireland |
| Vanguard FTSE All-World ETF | 0.22 | FTSE All-World | 8.5 | 3,691 | Ireland |
| Vanguard FTSE Global All Cap Index Fund | 0.23 | FTSE Global All Cap Index | 8.5 | 7137 | UK |
Source: Morningstar and fund provider’s data.
There is very little to choose between these five global equity trackers:
- HSBC’s global index fund is the cheapest and so tops the table.
- The SPDR and iShares ETF follow MSCI indexes whereas the others follow a FTSE index. The indexes vary somewhat in country composition but have performed almost identically over the last decade.
- Vanguard’s Global All Cap index fund has about 5% small cap exposure and greater diversification than the rest.
The reality is these shades of grey haven’t made much difference to results over the longer term. More on that in a moment.
I’ll also throw two other choices into the pot because they do something a little different:
- Fidelity Allocator World Fund W – OCF 0.2%
- Vanguard LifeStrategy 100 fund – OCF 0.22%
Vanguard’s LifeStrategy funds include a UK equity bias of around 20%. That compares to a 4% UK allocation for the true global index trackers in the table. You could choose LifeStrategy 100 if home bias suits your situation. Go for LifeStrategy 20-80 if you want an all-in-one fund that includes government bonds.
The Fidelity fund is actively managed. It features a REIT exposure and small cap allocation of about 10%.
Both are funds-of-funds. They manage their asset allocation by holding other index trackers instead of trading the shares of listed firms.
Here’s a useful piece on how to compare index trackers.
Best global tracker funds – results check
Source: Trustnet’s Multi-plot Charting tool
I’ve highlighted the ten-year annualised nominal returns for the global tracker selection above because that’s the longest comparison period we have for most of the funds in the mix.
Note: the FTSE All World and MSCI ACWI IMI entries show the index returns – see letters D and A in the Key column. I’ve also underlined the index’s ten-year returns in cyan.1
You’d expect a good tracker to lag its index slightly because benchmarks don’t bear the fund management costs. However, you can see there’s nothing in it over ten years, and the SPDR ETF is actually marginally ahead of its index.
HSBC’s FTSE All World index fund is the best performing fund by a decent 0.5% annualised margin over five years.
It’s also outstripped its index to a surprising degree for a tracker fund.
Counterintuitively, that doesn’t make it a better global tracker than the rest.
A tracker fund is meant to mimic its index. If its results differ too much then it suggests something else is going on.
For example, the FTSE All World index includes approximately 4,167 stocks. The Vanguard FTSE All World ETF contains 3,691 of those, while the HSBC equivalent holds 3,530.
It could be that the HSBC index fund has gained a temporary edge because market fluctuations have randomly favoured its particular deviation from the index.
Indeed, the Vanguard ETF was a 0.1% annualised nose ahead of HSBC when we checked a few years ago.
All of which is to say, don’t put too much weight on short-term return results which can easily be reversed by market moves.
Stress-free investing
If you’re starting from scratch then by all means choose the HSBC FTSE All World Index fund.
But there’s no need to switch out of the other top five funds because of this result.
Index trackers are typically cookie-cutter products. The results demonstrate the top five all work just fine. They are practically interchangeable.
The fact is we’re not checking performance to crown the one, true, best global tracker fund.
With me-too products, you don’t have to over-optimise. Any candidate from a field of well-matched rivals will probably be good enough.
Our performance check just ensures that nothing on our shortlist is broken, or not what we think it is.
A world of difference
That said, the performance check does enable us to see that the two funds that significantly deviate in composition trailed the pack over the last five years.
If UK shares or global REITs go on a hot streak then one of the bottom two could easily shoot up the table. But if you want a pure global market cap strategy then stick with the top five.
Here’s a few other things to note.
Fund sizes – All five index trackers in our top table have hundreds of millions in assets under management (AUM). Efficiencies of scale typically kick in above £100 million. The iShares ETF is more than 13 times the size of the SPDR ETF, but their performance is neck-and-neck over ten years.
Fixed income – The trackers in our table are equity funds. Owning additional high-quality government bonds is crucial to help you not to freak out during a stock market crash.
Check out our best bond fund choices to find your fixed income Venus for your equity Mars.
Understanding how to build your asset allocation will help you work out how much you need to put in safer assets.
Income versus accumulation – All of our best global index tracker picks come in both flavours, except the iShares and SPDR ETFs which are only available as an accumulating fund.
World and World ex-UK – I excluded these trackers, because it makes no sense to only include the Developed World or skip the UK when you’re trying to diversify across the whole world.
KISS
The beauty of the single global equity tracker strategy is its simplicity.
Yes, you could shave away a little cost by building a similar portfolio from separate regional trackers.
But is it worth the aggro in time and dealing fees? And can you trust yourself to stick to the global market’s verdict? Or will you justify trimming back on Japan or the US or wherever because you can apparently spot a bubble that everyone else has missed?
Fill your boots if you psychologically need the control – but know that you don’t have to.
Nobody can predict which strategy will win over your investment lifetime. But putting a global tracker fund at the core of your asset allocation is a rational choice in an insane world.
Take it steady,
The Accumulator
- The iShares ETF follows the MSCI ACWI index which has notched up an annualised return of 10.1% over ten years versus 9.9% for the MSCI ACWI IMI. Intriguingly, the SPDR ETF has outperformed its iShares rival a smidge, though its costs are higher and its index performed slightly worse. [↩]
If you’re willing to include world ex uk funds then another good alternative is
Legal & General International Index Trust (I) Acc.
OCF: 0.14%
Index: FTSE World ex UK
Emerging markets: 7.2%
Holdings: 2283
Domicile: UK?
Just make sure you get I class – L&G tend to quote more expensive classes
“…putting a total world index equity tracker at the core of your asset allocation is a rational choice in an insane world.”
Love this statement!
The article is nice but the importance of costs later on is understated in my view
0.1% of £10,000 is £10, but 0.1% of £1m is £1,000 EVERY YEAR
Lets say you are withdrawing a conservative 3% from that £1m to live on, your income (pre-tax) is £30,000 and £1,000 is 3.3% of that
Post-tax its probably going to be more
The big problem with all-world trackers is that you are overpaying for the 40-50% of the portfolio that tracks the US market
US market trackers can be had for under 0.1% per year – with the cheapest of these funds you are paying maybe 2x the best rate on nearly half your portfolio
Great to see Mr A get on the case with this – great overview. I guess my only thought was it would have been clearer to remove the last two from the table in the same way you didn’t add the ones without UK. Its a worry this confuses people with less time as there’s no column that clearly explains out of the choices what is ALL World and what is Dev world (unless you are an index nerd)…. or put these in another table underneath with the ex UK ones?
I’m considering balancing a Vanguard LifeStrategy 60% with Vanguard Dev. Wld ex-UK and Vanguard Emerging Markets in a drip feed ISA to re-balance the over-exposure to UK in the LifeStrategy product whilst keeping the advantage of automatic rebalancing bonds at approximately 20%. I may even add a component of Vanguard Global Small Cap.
I have the iShares version in my son’s JISA to go along with FTSE 100 and FTSE 250 trackers which together make up 60% of the portfolio. The other 40% is split between gilt and corporate bond ETFs.
Once the portfolio is big enough I’ll probably invest more actively, but while building it up this passive approach makes life a lot easier.
Is that really all there are? I thought HSBC did a world ETF (ex emerging markets) and I think Aviva does a fund. If you’re going to include multi-funds of index trackers then I know L&G and Blackrock have offerings, but am pretty unclear about the detail of how they compare with Lifestratgy.
Still, a useful article, thanks.
“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.)” – haha very good.
As ever, thanks for doing the research!
Mr Z
Thanks TA
We hold VWRL as our main core holding, but continue to question why pension funds and the like overweight UK (typically 40 – 60% stocks). The following points made by US investors regarding those in retirement, clarified the picture just a little :-
1) Adding foreign stocks increases the volatility of portfolio returns. Volatility is not the friend of investors who are withdrawing money because it exacerbates sequence-of-return risk. However, volatility may be more beneficial for accumulators because it can enhance the benefit of dollar cost averaging and sequence of return risk is not as important for them.
2) Adding foreign stocks adds the additional layer of currency risk. U.S. retirees, who are spending their money in USD, are better off not adding currency risk to their portfolios by investing in foreign securities. Accumulators may benefit from fluctuations in currency exchange rates because this might increase diversification benefits.
See Vanguard LifeStrategy mentioned again above.
Promised to come back to the subject of such constant AA funds in an earlier thread comment.
Daily rebalancing rang alarm bells recently, so ran a spreadsheet on basis of 60/40 portfolio and stocks falling 50% (=% daily) over 12 months, then comparing daily rebalancing versus annual rebalancing, with bonds assumed stable. If spreadsheet correct (yet to be re-checked); daily rebalancing frittered circa 6%, versus annual rebalancing.
Is that enough to be of concern?
We don’t see 50% stock declines that frequently, but those who worry about 0.01% fund fees might take note.
On the hypothetical return journey of a recovering stock market over the subsequent 12 months, without any benefit from a delayed rebalancing bonus, a further underperformance of circa 6% is observed.
So on our two year hypothetical round trip, our investor seems to have frittered away a total of circa 12% by daily rebalancing?
All this assumes the most unlikely circumstance of annual rebalancing dates falling propitiously.
If we see more severe stock falls than 50%, the situation would worsen.
if i were the chap running lifestrategy for vanguard i would set the system up so it rebalanced when an asset allocation threshold was exceeded, and not do it based upon an arbitrary time-period, e.g. day, month, year etc. You could say if things got >5% from original allocation
because at the end of the day, what you want is to do the bear minimum to keep your asset allocations constant.
it is conceivable that annual reblancing *could* miss a lot of movement and leave your portfolio allocation looking quite different to what you originally wanted.
But you have to be pragmatic, and if I were manually rebalancing myself I would prob do it annually just for the hassle factor
Thanks TA! Good overview & some great pointers.
Re investor compensation schemes – am a little baffled by this wrt “kick in if your broker or tracker provider goes up in smoke”.
I thought client funds/investments were ring-fenced & held in nominee or trust accounts by fund mgrs and platform providers. At least this is what I was told by my provider a while back with regard to active OEICs/UTs. Kind of assumed this would be the case with trackers and ETFs.
Am I confusing this with something else?
I presume that all of these various all-world trackers are cap-weighted within each national market invested. How does the UK component of an all-world tracker compare to the FTSE All-Share index?
Is the dominance of the top 10 companies in the FTSE 100 reflected in other markets? It doesn’t appear as marked so far as S&P 500 trackers are concerned.
My concern was that these all-world trackers may, in effect, be global mega-cap company trackers.
Any thoughts? Would it be better to complement an all-world tracker with all-world mid-cap, small-cap and income trackers and rebalance periodically?
Finally, should we be looking for all-world exposure to other asset classes such as fixed income (gilts or equivalent, index-linked bonds, corporate bonds), commercial property and residential property? Or is it more appropriate to have a strong home bias in these lower-volatility investments in order to reduce currency exposure?
re my post above:
forgot to mention that the £50k in UK & €20k in Ireland compensation was to do with any cash with the broker/platform provider awaiting investment decisions.
@magneto: rebalancing is good in fluctuating but generally even markets, but bad in steadily falling or rising markets. Not rebalancing is the opposite. In the long run, they even out.
There’s a paper I think from Vanguard looking at how frequency of rebalancing would have affected an investor in US stocks over about the last century. Frequent vs. annual or multiannual rebalancing made little difference. I think performance dropped off if you rebalanced very infrequently or never.
Thank you for the info,
Can you please do a similar article on Bonds, I’m not sure Vanguards only UK bond ETF (VGOV.L) is the worthy partner to VWRL as the one stop shop for bonds? Then again maybe I’m wrong
AG
Great post, TA, and superb timing as I’m doing the quarter-end rebalancing today. How I wished I’d read before I put in that SWDA order (rats! — now partly redirected to VWRL).
My view on the “constructed” world tracker is that it’s fairly easy to do, but only saves you about 10 bp (I did the maths in a previous comment). 10bp isn’t enough to be worrying about on most time horizons). You’d have to balance the additional trading costs against the rebalancing return you get from having more holdings. (but does anyone really believe that global equities are really uncorrelated?)
My remaining concern is that US equities are over-valued as US has huge investment market which likely suffers from home bias. (previous commenter’s point). Certainly not at all that all the ratios are a bit peaky right now. No. Definitely not taking an active position on that, me. Since most asset allocations are more or less equal, I’ve decided to underweight US in my portfolio which is only really possible if you hold the individual trackers as well as the global one.
On global bonds @AvantGarde, I like SGLO (G7 7yr) and INXG (UK 20yr linkers) as alternatives to VGOV (10yr gilts). See also SAAA (Global 7yr) and IGLT (10yr gilts)
@magneto — On that other thread, I explained why LifeStrategy had to do this to my mind (because it’s a 60/40 fund, not a 67/33 fund some particular Tuesday) and pointed to further reading from a more notable authority than you or I showing the *gains* from a daily rebalancing strategy for sufficiently large/deep-pocketed investors (i.e. Not us, but an institution). Did you follow that up and read it? (You didn’t really comment on it).
As others have said, generally things even out. I’m sure in some scenarios some particular strategy will be superior to another, but that’s true of any strategy. What about an annual strategy where shares blow up in summer? Etc.
I have zero belief that Vanguard would pursue this approach if it was significantly damaging to returns over the majority of time periods/circumstances.
To be honest, I’m not sure this thread about this supposed ‘risk’ of LifeStrategy each time it is mentioned is helpful, given that nobody agrees with you to be honest, and it might scare novice investors away from the fund.
This isn’t a criticism of your pursuing this line of thinking, it’s more a reflection of the realities of the blog format. (If we switched on the discussion board we’ve had waiting in the wings for 12 months, it’d make an excellent thread on there, for example).
As things stand, I think I’d prefer if we let it lie on posts that are nothing to do with rebalancing, such as this one.
cheers
TI
Again: it is a great book from Lars especially for brave and confident DIY investors who beleive they have an edge. Like me:) http://www.amazon.co.uk/Investing-Demystified-Speculation-Sleepless-Financial/dp/0273781340
@magneto, if you want to run the numbers with real market data the FTSE 100 has moved by an average of about .8% per day (sometimes up, sometimes down, that is the average of the absolute value) over the last 15 or 20 years. Plugging that into your calculations might give you something. Having said that I gave up my daily tracking stats a year or so ago when I realised that good enough was enough for me and went with LifeStrategy 🙂
Sorry TI, didn’t get to read your last post before responding…
@Cowboy — No worries, I have mixed feelings about my sentiments, but on balance I’d rather keep this thread about World Trackers if possible. There are LifeStrategy and rebalancing posts in the archives, although from @Magneto’s point of view probably not many readers.
Very timely posting, as I’ve spent the last week looking at the pros and cons of ETF’s from iShares (SWDA, IWDA, IWRD) and Vanguard (VWRL)
And I would like to add my support for a companion article on bond allocations. At the moment I’m blindly spreading investments across gilts (VGOV, IGLT, GLTS), corporates (ISXF, IS15) and linkers (INXG) and keeping my fingers crossed
@nick pick — I feel the same about bonds. I do understand the different exposures (currency, liquidity, credit and interest rate) but I’m not really any wiser.
I had a wonderful run with SLXX corporate bonds, but I now believe that these are just blends of equities exposure and bond exposure — ie they have no real value to add to diversifying a portfolio: you might as well stick to gilts / global government bonds (SGLO?) and equities. Sure they are attractive as they have non-rubbish yields compared with govt bonds but I suspect that’s more easily done by having a lower bond allocation.
@TI
Sorry for the sidetrack, just following up on a promise!
@ TA
“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.”
Suspect TA that the “compelling case” is one of several “compelling cases” in your investment armoury.
Have for many years been wrestling with the question of domestic bias, and thought the above quoted two reasons for upping domestic stocks in retirement, I.E. sequence of returns risk and currency risk, have some merit.
Lars dismisses the currency issue on the basis of hold more bonds and less stocks; which is fine as far as it goes; but there can be times such as now, when stocks look the lesser evil from a real income standpoint, and the investor may not want to hold quite so much in bonds or even cash. Even more of a problem, with a possible future slump in stock valuations the investor might then wish to add further to their stock allocation, and reduce bonds.
So the question remains: Why do UK Pension Funds and the APCIMS benchmark hold so much in UK stocks in spite of the good advice to go Global?
We have settled on about 1/3rd UK stocks, because ‘it feels about right’, being somewhere between pure Global weighting, and the AA used by UK Pension Funds. But that is a pretty poor reason for adopting such an AA. We continue to wrestle with this issue; and would welcome all thoughts!
@magneto — I have struggled with a similar issue. My comfort is that the exact asset allocation doesn’t really matter that much — just stick to it.
I think the Vang ftse all world ETF is a great product. its only missing global small caps to make it complete and that could be easily added along with a property fund and your there!. For investors with very little interest, long time horizon, £ cost averaging in, its great but you can,t ’tilt’, and for those who read up more and are abit concerned about going in with a 50 % allocation to the US, especially those like me a bit late to the game. its a put off. so everyones needs are different and unique. what i applaud is this site with its wealht of imformation avaliable so we each can choose what best suits our individual needs. i wish all this was about 20 years ago.
@mathmo and magneto
i agree
the perfect asset allocation dos’nt exsist
Just get the globe covered passively one way or another!
@magneto “Have for many years been wrestling with the question of domestic bias”
I guess this is more a question of *why* to hold a global portfolio (the subject of Lars’ post) rather than *how* to implement it (the subject of this post). That said… is anyone aware of solid research into the comparative performance of fully global portfolios and portfolios containing a degree of home bias?
The only evidence I’ve found is a Vanguard paper that suggests that, for the UK between 1988 and 2011, home biased portfolios had slightly higher returns and significantly less volatility than more globally diverse ones (see Figure 1):
https://pressroom.vanguard.com/content/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf
However, there’s no particular reason to assume that this can be extrapolated to other time periods or to longer or shorter timeframes. (It could just be a blip as a result of a particularly volatile world market during the study period or even just reflect the choice of certain cut-off dates.)
It would be interesting to see data comparing ‘pure’ global portfolios with home biased portfolios containing, for example, a 100%, 200% and 300% overweighting of the UK home market to see if there is any empirical evidence in favour of one approach or the other in terms of returns and volatility.
@TA – “You can tie yourself in knots fretting ….. ”
Personality type is a not insignificant factor in this kind of choice; risk averse/risk amenable, pessimist/optimist.
Personally, I’m a risk averse optimist if that’s not a contradiction in terms! Importantly, I’m drawing both the state and an occupational pension so my time horizon, and that of others in my situation, is necessarily shorter than that of most Monevator aficionadi. For what it’s worth, my portfolio is 20% VWRL 60% VGOV 20% instant access ISA and I “sleep easy” at night but @ TA – “Remember, there is no perfect solution …..” so as I’ve said here before, ultimately you pays your money and you takes your choice.
@Mathmo
Agreed. I had a similar experience with SLXX for a few years but have now stopped holding it and keep only VGOV for the bond portion
Didn’t realise until much later that SLXX (and other uk corporate bond ETFs) has around 80% correlation with FTSE100 (at least in 2013/2014). The yield was nice and the price rise was nicer too, but as you say they don’t diversify with equity component.
Recently VGOV also seems to be fairly highly correlated with world stock indices (VWRL – based on 2014 prices), so out of ideas now :-/
I added ASL for UK small companies after finding it mentioned in a few posts here. ASL is negatively correlated at the moment with VWRL.
But I have a feeling when the next crash comes it’ll go down together with VWRL
The only other asset class which gives good consistent negative (or close to zero) correlation with equities is gold but I haven’t been able to convince myself to buy it (no yield, entirely depending on price based on speculation etc etc)
@ Vanguard Fan – that’s all that’s relevant as far as I’m concerned. I’ve linked to a post that covers the other funds of funds but I don’t like them. The Aviva International fund you refer to is ex UK.
The point of this is to give rational options not overwhelm with detail (and I think I may have gone too far even on that score.)
@ Magneto – adding foreign stocks should decrease volatility due to diversification (though US investors don’t always see it that way due to high performance of US market), but agree about currency risk.
It could be that pension funds see home bias as a way of more accurately meeting liabilities but I really don’t know. Home bias seems to be ingrained everywhere but everything I’ve read – from many more sources than Lars – says it’s largely a comfort blanket excepting the fact that over any given timeframe the chips may fall in favour of one strategy versus another. That said, I fully understand it in the case of a retiree who’s liabilities are in £.
Anyone tilting away from bonds to equities without taking into account their risk tolerance is asking for trouble.
You’re spot on with your “several compelling cases” comment. I personally tilt towards small cap and value but am preparing myself for disappointment in the mid-term given the smart beta craze. I’ve been reducing my home bias over time.
@ Kean – you’re right, your asset should be ring-fenced but no can guarantee that the safeguards will work in all eventualities. Think fraud and incompetence and read the linked post for more.
@ Grumpy – these products are essentially large cap trackers but then so is a All-Share tracker. Of course you could add small cap to that at the price of added complexity and some cost.
@ Mathmo – chortle!
@ Topman – couldn’t agree more.
KISS is a great idea, though personally i prefer KICWAHCAWTTBTC: Keep It Complicated While Avoiding High Costs And Without Trying To Be Too Clever.
this is the approach of making your portfolio complicated enough to make investing interesting, while avoiding high-cost funds, cutting trading costs to the bone, only modifying your strategy at a glacial speed, and (if you’re not completely passive) being prepared for the probability that it will turn out that you have zero or negative skill as an active investor.
a typical day’s entertainment might involve noticing: ooh, look how far US REITs have gone up! i’ll have to sell some of that to rebalance if it goes on like that – but not yet.
(off-topic, sorry …)
Nick Pick wrote:
>At the moment I’m blindly spreading investments across gilts (VGOV, IGLT, GLTS), corporates (ISXF, IS15) and linkers (INXG) and keeping my fingers crossed.
What is the difference between VGOV and IGLT? They track different indices and have different dividend distribution schedules, but the share price performance is virtually identical as far as I can tell. However, Morningstar data suggests VGOV has a very much shorter duration than IGLT (which contradicts the Vanguard fund sheet).
I would also second a review of some of the bond fund and ETF offerings; VGOV is cheap but different data sources do not seem to agree on what one is buying.
Great follow up to the Lars article.
I’ve been sporadically investing in the Lifestrategy fund but with it being so heavily weighted to the UK, I might give FTSE ETF a look instead.
All of these suit my “hands off” investing style so I guess they are built for lazy bones like me!
Cheers!
Generally excellent advice, but I would quibble a bit. Those who are working and saving, yes bung it all in a world tracker and spend time earning more money to save. For those of us having to live off our accumulated piles I think it is worthwhile getting a bit more complicated to 1) Reduce costs, 2) Increase diversification.
On the costs part, a few bps can be shaved off by splitting into geographical trackers. A bit more can be saved by concentrating US listed US tracker ETFs in your SIPP, provided your SIPP provider is recognised by the IRS as a pension provider. The saving here is on the ability to receive dividends free of the usual 15% withhoding tax. US listed trackers have lower charges than LSE listed ones as well, although the difference is much lower than it used to be. Note that the US shares in SIPPs trick is only worthwhile if your SIPP is a reasonable size and you expect to hold for a long time, at least 5 years say, otherwise the additional FX charges swamp any gains from the saving on WHT.
For diversification, I am paranoid and like to split my investment between providers – more than one broker, more than one tracker company. I use Vanguard, iShares, Blackrock, Fidelity and HSBC, OEICS and ETFs. If you are earning/saving or have a decent pension, there is probably much less reason to be paranoid. I like to buy gilts directly as well rather than through a tracker, but that is largely down to my immensely miserly ways, although gilt trackers are much better value than they used to be a few years ago. It also fits in with my paranoia and control freakery if there is such a word – I can get precisely the gilt duration that suits me if I manage my own gilt ladder.
I believe that large investment portfolios can benefit from increased diversification – add a bit of small cap/value if you want, along with infrastructure, venture capital, REITs, corporate bonds, long duration gilts, foreign currency bonds, preference shares, PIBS, specialist ITs, gold, etc. Just don’t go OTT and don’t trade too often, no more than once per year, and keep at least 80% in mainstream trackers.
As for home bias – I don’t see the need, even for those living on investments such as me. Increasing home bias may even increase volatility if overdone, although this may not be the case for US citizens. Currency impacts tend to be uncorrelated with stock price movements; a depreciating currency is often offset by appreciating stock prices and vice versa, so currency movements are not necessarily as bad for portfolio volatility as they may initially appear. If you want to home bias something, do it with your bonds and take a slightly bigger bond allocation rather than cut down on foreign shares.
@Mathmo, global equities are not precisely correlated, which is why you get lower volatility by owning a global portfolio. It is complicated though as correlation is not fixed over time and just at the point where a lack of correlation is going to help the most, such as in the global financial crisis, all equity markets suddenly become correlated. This is why we hold gilts (and US Treasuries/Bunds for those with larger portfolios).
@Naeclue: ” Note that the US shares in SIPPs trick is only worthwhile if your SIPP is a reasonable size ……”. Ours are small. Is there any useful way of avoiding withholding tax for the small investor? If not in the US, then in Japan, Switzerland, …….?
If not, does that increase the attraction of corporate bonds over equities as investments for international diversification? My logic is that the relative valuations of bonds vs equities may well be set predominantly by domestic investors, who will avoid withholding tax, thus amplifying the relative value of equities for them, and consequently over-valuing equities for furriners.
@dearieme, I am no tax expert, but as far as I know there is no legal way to avoid withholding taxes other than through the pension route. I have heard that some European funds can avoid certain withholding taxes through stock lending just before dividends are paid, though whether there is any truth in this and more importantly whether there is any benefit to the investors I don’t know. Note that actively managed OEICS and ITs all suffer from withholding taxes and presumably foreign subsidiaries of UK companies have to pay it when paying dividends to the UK listed holding company.
One obvious thing you can do is to avoid the foreign “High Yield” ETFs, as you will lose more through withholding taxes for these than for normal index funds. Charges and dealing costs are higher for these as well.
Don’t forget as well that in the UK dividends are very lightly taxed. This is not the case in other countries. In the US for example, everyone pays at least 15% tax on dividends apart from shares held in a few ISA-type accounts. For US shares at least I consider dividend taxes to be built into the share price.
The only arguments I can see for home bias are 1) lower charges, 2) lower taxation. But best not let taxes wag the investment dog too much.
Hi All
Vanguard has a Global Bond Index fund as a compliment to its World Index Trackers.
It is even Hedged for UK investors
Running costs 0.15%
There is a Dilution Levy on initial purchase of 0.2%
xxd09
Oh look — VWRL just dropped below its 30-day moving average this morning. All you can eat buffet. Not that this affects us pure passive types one little bit.
Om nom nom.
I started off with a bit of scepticism towards this, but this article and Lars’ piece have changed my mind. Along the way, I’ve realised that there were a couple of huge errors in my own thinking that only became clear when I tried to find evidence to either back them up or contradict them.
Firstly, I was thinking about shares from different geographical markets as if they were different asset classes, with their own risk and return characteristics. But the differences between the performance of shares from different geographical markets are the reflection of changing local conditions, not of inherent features of those areas’ shares. So looking for an efficient frontier of equity home bias is a fool’s errand. (One that, like a fool, I spent quite a lot of time on!)
For the same reason, you shouldn’t rebalance between geographical areas. A lot of people advocate such an approach – but if they’d set their allocations in 1988 they would have spent the last 27 years rebalancing towards Japan’s sinking stock market (which accounted for 45% of global cap in 1988 but is now at around 10%). Incidentally, I think this is a big plus in favour of trackers. If you use separate regional funds and are making additional contributions, then you will need to ensure that these are at least roughly consistent with an updated global allocation. In short, another level of faff, and a whole range of opportunities for tracking error, poor decision-making, regret, panic etc.
My final concern was currency risk, but I think this is a case of distorted perception. The obvious response to currency risk is to tilt towards the UK and/or away from the US. This feels like a cautious decision, until you realise that it involves betting on the UK to outperform the rest of the world, or betting on the US to underperform it. Neither which feel like particularly cautious strategies.
@ Tim G
“geographical markets are the reflection of changing local conditions, not of inherent features of those areas’ shares. So looking for an efficient frontier of equity home bias is a fool’s errand. (One that, like a fool, I spent quite a lot of time on!)
For the same reason, you shouldn’t rebalance between geographical areas. A lot of people advocate such an approach – but if they’d set their allocations in 1988 they would have spent the last 27 years rebalancing towards Japan’s sinking stock market”
There is a lot in this response to set us thinking.
Many thanks.
When allocating to regions, we also look at PEs and especially in retirement Yields. Would like to think had we been using trackers in 1989, we would have held back on Japan on valuation grounds. But who knows?
@TimG — Actually, I am not so sure I agree with this. I think there’s plenty of company/sector-specific stuff going on at different markets that is partly (not entirely, but meaningfully) what drives (a portion) of their returns.
I recently wrote about the tech sector in the US, for instance, but there are plenty of other examples, especially as you go out into smaller and/or emerging markets. I’ll try and write about this in a future article for you. 🙂
Of course the main issue is that most private investors, like most macro hedge funds and so on, are not going to be able to call different country’s sector-based moves any better than moves based on “changing local conditions” — that is not any better than the market as a whole.
That is the big plus of a global tracking approach — it doesn’t matter exactly what is driving the disparate returns from different markets, it’s that you’re getting the wisdom of the crowd leading you to the average global market returns that you probably don’t have any reason to think you can better than by trying to DIY allocations yourself.
Plus the spectacular ease of it.
If there’s a downside for passive investors, as others have said it’s probably cost. A global tracker ex-US plus a US total market ETF charging 0.05% would likely save a fair bit of change over the long-term versus a one-shot solution, if you were so minded to chase the pennies, manually rebalance, and so forth.
Cheers to you and everyone else for another good tranche of thoughtful comments.
@TimG
In your comment on rebalancing I *think* what you’re saying is that your geographical allocation of equities should track market capitalisation, and then you should rebalance your portfolio to that new allocation. (I.e. use your geographical allocation to produce something like a global tracker.)
As opposed to setting a fixed geographical allocation (perhaps representing “today’s” market capitalisation) and then sticking to that forever.
I’m not knowledgeable enough to comment on whether it’s a Good Idea or not, just making sure I understand what you’re suggesting.
The most beautiful thing in an all world index is You do not need bother with rebalancing. Especially if You are 100% in stocks.
@TI “Actually, I am not so sure I agree with this. I think there’s plenty of company/sector-specific stuff going on at different markets that is partly (not entirely, but meaningfully) what drives (a portion) of their returns.”
I guess what I was trying to say was not that there won’t be different factors driving different markets, but rather that even where we can identify these factors there is no particular reason to believe that they will persist into the future, as opposed to the factors driving the different behaviour of bonds and equities. As a result, the latter provide a basis for identifying the efficient frontier, the former don’t. (Although maybe one could argue that higher volatility and returns are an inherent feature of emerging market stocks in comparison to developing market ones?)
Your article on the US and the tech sector was definitely one of the things that got me thinking about the downside of home bias, which would have left me betting on the UK against the US and, specifically, betting against the tech sector. It made what I thought was a cautious choice feel rather rash. It’s easy to be dismissive of the benefits of diversification until you have to justify the alternative!
@Nick “In your comment on rebalancing I *think* what you’re saying is that your geographical allocation of equities should track market capitalisation, and then you should rebalance your portfolio to that new allocation.”
That’s right – or just use a global tracker. I’m not actually convinced that the efficient market hypothesis applies to global equities (the Japanese case seems to be a strong counter-example). But if the market isn’t efficient, it’s still unpredictable enough for it to be impossible for someone like me to outperform it.
@Nick “I’m not knowledgeable enough to comment on whether it’s a Good Idea or not, just making sure I understand what you’re suggesting.”
As a self-confessed fool, I wouldn’t go so far as to *suggest* anything! Personally, I don’t have the kind of expertise that might provide a basis for a more active approach – so passive it is, for me.
For what I lack in investing prowess I make up for in self awareness. I know I wouldn’t have the discipline to rebalance and research multiple funds. Therefore VLS100 fits the bill for me until my portfolio reaches a level where I feel uncomfortable with the amount in this fund.
Whilst the advanced investors will prefer to set up bespoke portfolios, these All World funds allow the less sophisticated to easily access the stock market as opposed to staying in cash for fear of complexity
Another great read. I like the Vanguard Lifestrategy 100 tilt towards the UK as it takes currency risk in to consideration. Moreover, the skew isn’t as pronounced as one might think as the FTSE Allshare has built-in exposure to international earnings.
“The point of this is to give rational options not overwhelm with detail” -The Accumulator
I can’t agree enough. I’m a novice 31 year old with a fair load of £ tucked away in Vanguard Lifestrategy 100% so I can just get on with life. I know this topic is a hobby for some of you but if you took the time you waste debating the minutiae of passive investing and focused it on creating an additional income source to then invest, you’d be a lot richer fairly quickly!
@Hjones: You write:
But then we wouldn’t have a website! 🙂
I agree with the rationale of your general sentiment, but then I agree passive investing makes the most logical sense yet invest actively myself. Some of us do love this stuff (luckily for those who write about it! 😉 )
Magneto, re rebalancing. I have back-tested performance data going back to 2005 from Vanguard. In 2008, the average of the Mixed Asset 40% to 85% sector was -19.95%. Vanguard Lifestrategy 60% would have lost 12.47%. Conversely, in 2009 the 40% to 85% sector gained 19.48% but the Vanguard Lifestategy 60% gained 15.62%. Therefore, a sector that can tactically rebalance between 40% and 85% in equities lost to daily rebalancing over the two calender years. This is exactly the same story for all the Lifestrategy funds throughout 2008 and 2009. They all beat their Mixed Asset Peers.
Annual rebalancing is more risky than shorter-term rebalancing, purely because you are not smoothing out the peaks and troughs as much. Much the same as monthly investing versus annual. A lot can happen in markets in one year, and it then becomes an active call whether to rebalance or not, given market conditions at that time. You have to be more disciplined with an annual rebalancing strategy. It certainly becomes more of an active investment call.
@woody
Good insights. Issue certainly not black or white.
Would be interested to develop further, but subject declared off-topic.
Maybe we can pick this up and move it forward in a later thread?
All Best
Most rebalancing studies I’ve read conclude that results are highly dependent on time-frame. In other words, you don’t know in advance if rebalancing will improve your results or not, nor how often you should rebalance. Therefore DIY investors are best of thinking of rebalancing as a tool to maintain asset allocation not as a method of optimising returns. Annual rebalancing is absolutely fine.
If you look at costs as a primary driver for your choice and have an IWeb account, they offer the Fidelity Index World I Fund (institutional) with OCF 0.08%. No point to go anywhere else for more expensive ones, even Vanguard.
@Lorenzo – Fidelity Index World I Fund “No point to go anywhere else for more expensive ones, even Vanguard.”
Except that it doesn’t include emerging markets. From the KIID: “The MSCI World Index captures large and mid cap representation across Developed Markets countries.” This is the index this fund tracks.
Secondly, charges in the KIID are given as 0.15% (rather than the 0.08% given in the iWeb info). Not sure which is correct, but iWeb info generally strikes me as a bit patchy.
@Tim G:
not keen exposure to Emerging Markets therefore for me it is a no-brainer for global investments. Whether global or non-global means only developed or developed+ emerging markets it really goes back to your investing style and preferences. With regards to OCF, I’ve checked with them and it is 0.08% (although the fact sheet reports 0.15%) as it is the institutional version. Hope this dispels your doubts.
Lorenzo. Fidelity Index World W is available across most platforms @ 0.20%. If you buy it via Fidelity you get it for 0.18%. The 0.15% Institutional version is only available for £10,000,000 minimum. If you click on the KIID it gives you the correct charges, or google it and look at their own, morningstar’s or trustnet’s website.
Fidelity’s tracking performance is also pretty woeful.
@Woody085: as I said, the Fidelity Index World I (not W) is available with IWeb at 0.08% although the factsheet reports 0.15%. They allow you to invest in the institutional one and in many institutional others you wouldn’t have access to; I’ve done the same with the HSBC All-Share tracker (OCF 0.02%). If you buy it with IWeb, at the end of the procedure they highlight that the OCF is the one I’ve reported. Regarding the tracking performance, I agree with you, but I’m not going to waste 3 times the money to buy Vanguard (OCF 0.24%)
Google “GB00B7LWFW05”, you will not find the I class at 0.08%. It is 0.15% across all major research tools and Fidelity’s own website. FE Analytics lists all available share classes and there is not a 0.08% version. iWeb has it wrong.
Vanguards tracking errors/net excess returns are so tight that they can, and do, easily negate marginal differences in cost. Morningstar have also given them the best ratings based on tracking and cost.
@woody085: log onto the IWeb website, market research and look up for it; as an alternative call them, that is my only suggestion, I can’t convince you if you do not believe me, sorry. Moreover, HL has special agreements with fund managers (see Woodford) to decrease fees, I imagine this is just another an example but with IWeb.
I see that you’re a Vanguard super-fan so I’m not continuing the conversation if you’re so biased. Have a great Easter.
Looking at this further a few website’s have reported an AMC of 0.08% for the I share class, which is obviously not the same as the OCF. I would be inclined to contact Fidelity directly rather than trust iWeb’s word, after all, they do not run the fund.
Whenever a special deal is done, a new share class is created. You cannot have two different OCF’s for one share class. Rebates are still possible but I cannot see iWeb having the scale to negotiate a better deal than anyone else.
Just trying to help. Happy Easter.
a neewbie , your opinion please if investing in these two:
L&G interntaional index trust class c and L&G uk index classic, how would you weight these if just running these two together .I have read some of your ideas I am debating Hargreaves but note some of your favourates not available so grateful for best buying paltform too thanks
Hi
You can breakdown them as per vanguard life strategy 100% .You can check this at hl.co.uk .The uk component in the LS is about 22.96%.
They have further divided uk into 3 sub categories 1) all share -17.87%
2) vanguard ftse 250etf-1.11% 3) vanguard ftse 100 etf -5.74%.
The UK home bias is bit higher in Vanguard LS series than vanguard etf (vwrl) range for some reason .
Similarly , you can check i shares ,fidelity funds ,etc for breakdown ratios and compare their performance.P
Chyreene: also read this post on monevator .
http://monevator.com/asset-allocation-construct/
The following global etf’s can also be compared against vanguard series which are listed on justetf.co.uk
https://www.justetf.com/uk/find-etf.html?tab=documents&from=search&isin=IE00B6R52259&index=MSCI%2BAll%2BCountry%2BWorld%2B%2528ACWI%2529
re. the Fidelity, I’m struggling to understand your opinion of it. You mention it’s not a ‘true total world index tracker’, but don’t say why. Could you explain further?
I’m looking for non-ETF, non-Vanguard (for diversification reasons) equity index trackers to invest in. The Fidelity might make things simpler (i.e. it would prevent me having to research/endlessly deliberate over the various funds required to cover the world), though I realise I’d need to add some emerging markets exposure, and potentially boost the UK bias too.
Given I’m trying to avoid Vanguard and ETFs, would Fidelity be a poor choice here?
@Jonny
Fidelity is “not a true total world index tracker” because it doesn’t include emerging markets. It’s up to you whether that matters and, if so, if you address it by adding a separate EM fund or going for a single fund that covers everything. Just as it’s also up to you whether you tilt towards UK. In fact, as it’s your money – everything is up to you!
@Tim G
The emerging markets was my initial thought too, though the same paragraph says the LifeStrategy fund has emerging markets exposure (unless that isn’t considered a true total world tracker due to the additional UK bias).
@Jonny
Yes – the “objection” to the LifeStrategy 100 fund is precisely that – that it has UK bias. I also think the LS fund is put together on a slightly different basis, so that it isn’t tracking an index per se but is instead a basket of ETFs that gives you broad equity exposure.
To put it very simply, there are two reasons for going for the world tracker approach: one is the efficient market hypothesis (that it represents the collective judgement of investors and we are therefore unlikely to outperform it); the other is that it offers diversity.
If you’re a disciple of the efficient market hypothesis, then you should ensure that you have a true world tracker (or that you replicate any missing elements in a dev. world tracker by adding emerging markets). If you’re less theological about these things, then a reasonably diverse equity holding is sufficient to meet your needs, in which case LifeStrategy or Fidelity (and possibly others, too) are eligible.
The Life Strategy fund on top of the UK bias allocates according to Vanguard’s formula rather being a true market cap tracker. So if the world’s investors valued the US at 60% of the global market the LifeStrategy fund would necessarily follow whereas the others would.
As others have said the Fidelity tracker doesn’t included emerging markets – see the bit about World vs All World in the post.
According to its fact sheet VWRL “covers more than 90% of the global investable market” including Large, Mid Cap and Emerging Markets. It holds more than 2900 stocks which is more than any other ETF as far as I can see. If inclined to do so this could be complemented by a holding of up to 10% in the Vanguard Global Small Cap Index with 4160 stocks to give yourself a truly global tracker.
The Lifestrategy funds actually cover Large, Mid and Small cap along with emerging markets, albeit with a home bias. The 100% fund currently holds 6428 stocks. Obviously its a different animal to VWRL. However, it is extremely diverse because it holds All Share Trackers including the Vanguard US Equity Index which uses the S&P Total Market Index (over 3600 stocks).
Mr Bogle is very keen on investing in the whole market. Unfortunately we can only do it in one fund via Lifestrategy in the UK. Who knows, maybe we will have an ETF one day.
After all, there is a FTSE Global All Cap Index.
http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue/GAE?issueName=GEISLMS
Hi All
I’ve read through all of these replies and don’t really see the following covered.
What are your views on holding a bunch of Index funds as opposed to a single world indexer.
I hold funds tracking US, UK, Japan, Pacific excluding Japan and Emerging markets.
These make up the world equity part of my portfolio and seem to be tracking the FTSE World Index tightly.
So far as I can work out my costs are lower than if I was using a single world index. I’ve also split across three providers (Vanguard, Legal & General and Blackrock) which makes me feel a bit better for some reason.
The only downside is re-balancing, it’s more of a hassle with so many individual funds.
Hi Hollow,
I think you’ve covered most of the issues right there. Slightly cheaper cost for a lot more hassle? Is it worth it? If you pay dealing charges then the cost savings may not pan out either.
The biggest issue of all though is psychological. With an all-world tracker, you can trust it to faithfully track the market. But can you trust yourself to rebalance into a losing fund for the tenth year in a row? Might you think that the US looks a bit overvalued so I’ll make a few tweaks to the asset allocation the rest of the world is presenting me with? It takes a great deal to resist those temptations, especially when the pressure is really on.
@TheAccumulator — well that’s a timely comment… I’ve been trying to understand something here about rebalancing and I fear I am about to ask something very stupid…
I get the idea of rebalancing between asset classes (e.g. equities / bonds), but I don’t understand rebalancing *within* an asset class (e.g. a set of geographical funds used to make up a home-brew world tracker).
Surely the relative values of the funds reflects the markets view of current value and rebalancing the funds back to your original distribution is the same as claiming “edge”? Shouldn’t you allocate new money in proportion to the funds’ current values (rather than in the original proportions that you first thought of).
As an extreme example, if the US economy went completely off a cliff due to a fundamental change in circumstance (I dunno… think force majeur on an an extreme scale…) I assume you wouldn’t keep pouring money into a burning hole in the ground while repeating “but that’s what my asset allocation says”.
Happy to be pointed to one of your (excellent) explanatory posts if I’ve missed something, but my interpretation of them to date is that they focus on the equity / bond rebalancing (e.g. http://monevator.com/rebalancing-asset-allocations/) , but then apply it to rebalancing within equities (e.g. http://monevator.com/how-to-rebalance-portfolio/).
What am I missing…?
@ NMcG – you make a great point. Re: equity rebalancing, there’s a distinction to be drawn here between subscribing to the total world view and between tilting your portfolio in certain ways and then maintaining that asset allocation through rebalancing.
So if you decided to buy individual funds to replicate a Total World strategy then you are quite right, you would leave it to run and not rebalance between your equity funds. You would also adjust new cash inflows to reflect changing balances between the US and Japan or wherever.
But in reality, people tend to tilt their asset allocations. e.g. 20% in the UK because of currency risk, 10% in emerging markets because I want some diversification but less volatility then a full-blooded allocation would incur, 10% in small caps (hoping to outperform large caps) and 10% in property (greater diversification) and so on.
In the latter instance, you’ve adjusted your asset allocation for specific reasons, based on sound investment practice, and rebalancing is the discipline that keeps you on track. With any luck you might even get a performance bonus out of it too by buying low and selling high.
In truth you would choose individual country funds because you wished to depart from the total world view.
@the accumulator
You said:
“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.”
How can the IMI version be less diversified when it holds 9,000 stocks and 99 % of world’s investable market? I can’t believe you made a mistake so it must be me that’s missing something?
Thanks.
Hi Italianoleone – the index holds 9000 stocks but the SPDR ETF doesn’t. The IMI version holds about 800 while the non-IMI holds 1200.
Thanks, Accumulator. I have a lot to learn.
Please give me your opinion – if you had to choose SPDR IMI ETF (800 holdings – IE00B3YLTY66) or SPDR non-IMI ETF (1200 holdings – IE00B44Z5B48) for your single long-term retirement savings ETF, which one would you choose? Thanks.
Personally, I’d probably go with the IMI because it has a slight slant to small cap. Don’t sweat it though, it won’t make much difference over the long term.
@Accumulator
Couple of more questions about these two SPDR ETF’s please:
1. Both ETF’s started at the same time (may 2011) but the non-IMI version fund size is 12x times bigger ($380 mil) than the IMI version ($30 mil). Should that influence my decision on which one to choose?
2. How come the non-IMI version of the ETF holds much more stocks (1200) than the IMI version (800) despite the fact that the non-IMI index holds only 2500 stocks and the IMI 9000? My logic would be that the IMI version would hold much more stocks given that its index holds much more stocks than the non-IMI index.
Thank you for helping me get my life in order.
The larger one is likely (but not guaranteed) to have more liquidity and lower spreads. The smaller one has a greater chance of being closed because it’s not attracting enough assets. You wouldn’t lose your money but you would be out of the market if your ETF closed. I suspect the IMI index has more stocks because it tracks more small cap firms which are too expensive for the ETF to buy so are optimised out. I can’t explain why they only track 800 stocks though. Try emailing them and let us know what you find out – it would be interesting to know.
Accumulator, I have sent them an email. There was no “private investor” option on the contact form so I had to enter something under “company name” and “investor type” (I entered consultant). Hopefully they “buy it” and answer me and I will copy their answer here.
On all forums I asked this comparison question, everybody prefers the IMI fund vs. non-IMI because it also covers small stocks – just like you. But now you got me concerned with the possibility of IMI fund closing because of lack of assets. You think $30M is not enough after five years?
Let’s assume it closes. You say I won’t lose money but I don’t understand what you mean by “you would be out of the market. Can you explain?
So I got this response from SPDR Europe:
“All SPDR ETFs are physically replicated and both the SPDR® MSCI ACWI UCITS ETF and SPDR® MSCI ACWI IMI UCITS ETF use optimisation to track the performance of their respective benchmarks. Therefore, the portfolio managers of the funds have the discretion to decide how many stocks they need to obtain in order to replicate performance.
The difference between the two indices is that the ACWI IMI included small cap stocks. These however make up an extended tail end of the index, and thus form a small portion of overall index performance. For efficient portfolio management, many of these constituent names would not need to be held in order to best replicate index performance. We hope this helps.”
What do you make of it and what are the chances that this fund will be closed in the future? I don’t want to put all my money monthly for the next 20 years in a fund that seems to be suffering.
Not very helpful, eh?
Here’s a post I’ve written about being out the market:
http://monevator.com/what-are-the-risks-of-being-out-of-the-market/
It’s impossible to know if the ETF will be closed but this is a decent piece on the topic: http://www.etf.com/etf-education-center/21032-managing-and-avoiding-etf-closures.html
Choose your trackers on the basis of whether its rationale to have that asset class in your portfolio. Big tick here. If you’re particularly worried about the impact of the fund closing after reading the above then choose the bigger fund.
You can’t predict in advance which will perform better anyway and the difference is unlikely to be particularly important at the end of the day.
Thank you, very valuable articles.
I am not at all bothered by time out of market.
I’ve read the piece on etf.com you linked and based on it here are my conclusions about chances of SPDR MSCI ACWI IMI ETF being closed:
– AUM: The good “assets under management” size is $50 million. This ETF is not close with $31 million but it’s not too far for my comfort either.
– The strength of the issuer: State Street Global Advisors (SSGA) is the third largest asset management firm in the world (second looking at only ETFs). I think it is reasonable to expect strength and stability there.
– Fund Rank In Segment: There are not a lot of ETFs that offer the same strategy of covering 99 % of world’s investable market. Certainly far less than ETFs covering S&P500. So I expect it’s less likely to close as the market is not oversaturated with such funds.
Please correct me if I’m wrong on any of my conclusions.
My last puzzle is your statement in this article (we are commenting now) that the IMI fund is “less diversified”. What do you mean by that?
I responded to SPDR expressing further bafflement about the smaller number of stocks in the IMI fund (which obviously tracks a much larger index) as well as my concern about the relatively low assets under management hence the danger of a fund closure. This is their response:
“From a portfolio management perspective, it is not enough to look only at the number of names held in the ETF. Working alone on that basis will steer the fund towards unnecessary additional trading costs, which will then inherently compromise the funds ability to track the benchmarks performance.
Secondly, on an investment level, the broader universe included in the ACWI IMI index has contributed to a fairly small difference in performance terms versus the ACWI index. Over 5 and 10 years, the returns difference on an annualised basis equates to 0.02% and 0.20% respectively. (Benchmark returns sourced from Bloomberg).
Acknowledging the latter point, if your clients are most comfortable with a larger fund, the SPDR® MSCI ACWI UCITS ETF has significantly more assets under management and has provided close returns to the IMI index over the long term.”
Everybody I talked to prefers the IMI fund because it includes small stocks. So I’d like to start automatic monthly investing for my retirement with this single fund. But also because the ACWI IMI index has outperformed the ACWI index 146 % vs 127 % cumulatively over the past 15 years as seen in this chart: https://www.msci.com/resources/factsheets/index_fact_sheet/msci-acwi.pdf
But in this same PDF the annual return since 1994 is virtually the same for both indexes…
I nit-pick this much because I’d like to pick one ETF for the next 20-30 years and never look back. Never touch it. That’s how passive (lazy!) I am. Now I’m stuck between the IMI and non-IMI fund. First world problems, right? 🙂
If nothing else, I’d like to learn from you Accumulator as to why you think the IMI fund is not as diversified as the non-IMI fund?
I wouldn’t get too hung up on the returns. If small cap has a bad 10 years then you can expect non-IMI to outperform IMI. Otherwise IMI should edge it but is likely to be slightly more volatile. It’s not likely to make a huge difference and it’s not forecastable.
IMI is less diversified because it contains a third less stocks.
I’ve just remembered this post that might be helpful while you ponder: http://monevator.com/how-to-read-a-fund-fact-sheet/
All your comments in 86 above seem rationale to me.
If by volatility you mean standard deviation that is listed in the fact sheet, the IMI fund is better over the last three years but I’m not sure if I’m reading this correctly?
– Fact sheet ACWI IMI: https://www.spdrseurope.com/library-content/public/SPYI%20GY_factsheet_en.pdf
– Fact sheet ACWI: https://www.spdrseurope.com/library-content/public/SPYY%20GY_factsheet_en.pdf
Based on your and opinion of others I’ll pick the IMI one and stick with it for couple of decades until the retirement.
I’ll also recommend it to my young nephews and cousins who are in their twenties and need to start saving as soon as possible.
One option that hasn’t been suggested in this thread is the possibility of using US based Vanguard ETF funds. All their significant funds have HMRC reporting status and are therefore subject to capital gains tax rather than income tax. They may be subject to withholding tax on income of 15% (with an appropriate W8-BEN in place), but this is offsetable against your tax bill so in overall terms does not have an impact. As mentioned in another excellent Monevator post it works out better than an Irish based ETF such as VWRL where the significant US portion will be subject to withholding tax on its income of 15% which is never recoverable (http://monevator.com/etfs-and-the-peculiar-effects-of-withholding-tax/).
You could go with VT Total World Stock ETF which has an expense ratio of 0.14% and 7510 stocks. Personally I am partial to the idea of a combination of the Total US market VTI with an expense ratio of 0.05% and 3668 stocks and VXUS Total International Stock ex-US with an expense ratio of 0.13% and 6050 stocks. This gives massive diversification with over 9000 stocks at an average cost of less than 0.1%. It also gives you the option of slightly lowering the US portion if you struggle having over 50% in the US.
The two main issues are exchange costs and being caught by punitive US estate taxes if you die. You can obviously minimise the former using foreign currency accounts and exchange rate specialists, or a platform like Degiro charges 0.1% on FX. I believe the buy/sell spreads for these huge funds are tighter than for VWRL so there is a saving there. The estate taxes I am personally less concerned by and I believe there is a concession that these can be avoided when an estate passes to a spouse. I prefer the option of staying alive.
I recently spotted a new fund from Vanguard – the Vanguard FTSE All Cap Index Fund – GB00BD3RZ582.
At first glance this looks like a great global tracker comprising both developed and emerging market markets all in one place. It seems to provide an alternative to both VWRL, Vanguard’s global tracking EFT (downside it’s an ETF and makes it more expensive for me to invest on my platform) and b) Vanguard’s 100% lifestrategy fund (downside – considerable UK bias). My thought was that combined with a global hedged bond tracker that this would provide an excellent, simple and easy way of achieving Lars Kroijer’s two fund investment strategy.
Two questions:
1. I can’t see any real downsides to this fund. It seems to have a relatively high number of securities and the global diversification I am looking for in a fund rather than an ETF. I haven’t seen anything similar in the market. Am I missing something I should be aware of?
2. The fund is obviously new, is quite small and appears to have some tracking error. Is there anything to be aware of when investing in newly established funds?
All thoughts gratefully received.
I am not an expert, but I *think* you can achieve a global tracker for a bit less, by combining 3 Vanguard funds/etfs.
1. Developed World Ex UK (OCF 0.15%): https://www.vanguard.co.uk/uk/portal/detail/mf/overview?portId=9210&assetCode=EQUITY##overview
2. Emerging Markets: VFEM (OCF 0.25%): https://www.vanguard.co.uk/uk/portal/detail/etf/overview?portId=9507&assetCode=EQUITY##overview
3. FTSE 250 ETF (VMID, OCF 0.10%): https://www.vanguard.co.uk/uk/portal/detail/etf/overview?portId=9525&assetCode=EQUITY##overview
The rationale for doing this is that you get the Dev World portion for cheaper. That’s about half the total at about 0.1% less per annum, so perhaps not much of a saving to be honest – a weighted saving of c. 5 bps? Also, VFEM is not all-cap, so you would need something else for your small cap EM exposure.
HMWO is a global tracker for 0.15%. Also I think no small-cap element and I do not know how you would go about allocating a proportion of your funds to a small-cap etc/fund to go with it.
Others have pointed out you can get a US tracker and couple it with an ex-US fund or two. By getting them all in one you overpay for the US segment. Someone with a lot more seeming naus than me wrote an interesting post about it on this site, but I can’t recall where.
Accumulator, maybe do a piece on building a global tracker with the aim of paying less than the going rate for an all-in-one job?
@ Floatboy – I don’t think you’re missing anything. HSBC FTSE All-World Index Fund C will be similar – it doesn’t cover small cap but the impact of that is likely to be marginal. Newly established funds sometimes take a while to settle down re: tracking error but Vanguard’s funds are normally excellent in this regard. They can also fail to attract enough assets and be closed but that normally happens to niche products – which this isn’t – and I can’t recall Vanguard closing a single fund in the UK so far.
I haven’t read every single comment so please forgive me if my point has already been covered, which is to do with the Vanguard Life Strategy 100 fund compared to their All World ETF VWRL. Whilst I am aware of the differences between the two – UK bias and lack of emerging markets in the LS100 – I can see how that relatively minor difference can account for the big difference in performance over the last four years. To clarify:
2012-13 2013-14 2014-15 2015-16 2016-17
LS100 16.71% 7.24% 16.41% -1.6% 30.29%
VWRL —– 18.09% 7.78% -12.24% 22.25%
It looks like a big difference in performance between what are both meant to be ‘All World Trackers’. Can the difference be just due to the UK bias and Emerging Markets?
LAST SECOND UPDATE: Just checking the fact sheet for LS100 it DOES now include Emerging Markets (7.2%) – I don’t know when they started including that. VWRL doesn’ seem to break down its weightings in this way – just by countries and sectors.
Typo – I can see how that relatively minor difference – should be….. “I can’t see”
@uhm.
Hi,
Vg LS100 isn’t an all-world tracker; it’s just a 100% equity product that follows a marketable set of indices.
Anyway, VG have a new index fund now that should interest you: the FTSE global all cap index fund. It’s unde a year old. It’s broader than VWRL and you don’t have the same bid/offer spread problem as with an etf. Buy it and hold it.
Best,
Alex
I opened a Lifetime ISA and dropped a lump into that new FTSE global all cap index fund (and the Vanguard global bond tracker).
It has only been a few days but that new tracker is matching my existing ISA portfolio very closely. (Existing portfolio is made up of 9 index trackers, covering the whole world in proportion, and the bond tracker).
I thought it would be interesting to compare them.
We will see how it goes I suppose, so far so good.
@Alex – Thanks for your reply.
I suppose you’re right, although I’d always thought of it as an all world tracker, it’s really just a collection of other trackers.
Yes I was also looking at the Vanguard fund you mention when writing my first comment here. I like the fact it includes small caps as well – I think this is the one for this year’s ISA .
Vanguard seem to have added a number of new funds recently – the Global Equity Income fund was not there when I was looking for such a fund around a year ago, just the UK equity income.
HSBC has a similar global index with ongoing charge of 0.20pc, but according to the FTSE index it tracks it would only have Large and Mid Cap stocks.
ISIN code: GB00BMJJJF91
HSBC FTSE All World Index Class C –
Vanguard’s global all cap, which I own in my SIPP, only samples the constituents (c.4k of c.7k), so Vanguard’s global small cap has about the same *number* of underlying shares (c.4k). So a combination of HSBC global (c.2k of large and mid cap) and VGs global small cap (c.4k) might be closer to full replication.
However, VGs small cap fund is strangely domiciled in RoI.
I sometimes regret that there is no global mid cap index fund (FTSE does have an index for that, as well as only large only and shall only), because with three funds according to index, one could potentially balance the volatility according to ones taste.
Is a world tracker really better than one that tracks US equities? World indexes seem to suffer the same losses as the US but with less growth in the good times. Also US-only tracker funds tend to charge less. Does it essentially come down to a bet on whether or not the US remains the dominant world power? With their enormous economy, the reliance of emerging markets on the US buying their stuff, and the colossal power of the US military, I’m inclined to think the US are going to continue to dominate for at least another 50 years plus.
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.
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).
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.
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.
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.
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.
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.
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! 🙂
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.
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?
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.
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.
@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.
An interesting simple portfolio approach ws proposed in a moneywise article – 30% in a FTSE all share tracker, and 70% in a developed world ex. UK tracker. Could cover for the variability in our currency, as well as having position in the rebound of UK stock market once Brexit is settled? (as of today FTSE 100 yields 3.95%…. juicy!). Plus all the mentioned cost and diversification opportunities from trackers.
Hi and thank you for this article guys
What is your opinion of VWRL ETF vs FTSE GLOBAL ALL CAP GB00BD3RZ582 ?
Thanks
I prefer the latter – includes some smaller capitalisation companies as well (‘All Cap’), but I have both
https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf
Hi – VWRL is priced in GBP, its base currency is USD and it is a global tracker. I’m having difficulties understanding the implications of this related to currency risk. Could someone explain further please?
If the dollar price of global shares do not change, but the pound drops against the dollar, the price of VWRL, in pounds, will rise. If VWRL was priced in dollars, its price would not change, but it would be worth more to you as you would get more pounds on converting the dollars.
It does not really matter what currency VWRL is priced in as your currency exposure is not hedged, but it is convenient for UK investors to have VWRL priced in pounds because no currency conversion is required to purchase. If you buy an ETF priced in dollars your broker will convert your pounds to dollars before purchasing and charge you a foreign exchange fee (this may be hidden from you). They will do the same when you sell.
Worth mentioning that all dividends from VWRL will be paid in dollars and your broker will charge a fee to convert these. Some brokers are better than others in this respect, for example Hargreaves Lansdown currently charge 1% of the dividend, recently cut from 1.7%.
I’m in FTSE Global All Cap. Am I missing out on anything by not going for an ETF?
@Chemist Dude: no, you are not missing anything.
For long term investing just stick with an index fund. If you get an etf then you will receive dividends that are subject to charges (which add up) and you’ll have to deal with the pain and cost of reinvesting them. I have found this awkward in that the regular investments I have set up with platforms like interactive investor or aj bell don’t deal with it very well.
Having said that you need to make sure that the custody charge levied by your platform (Hargreaves Lansdowne or whoever) for your index fund is not excessive. In this respect it can be cheaper to hold an etf.
1. iShares MSCI ACWI UCITS ETF (SSAC) now has a lower ongoing charge: 0.20%.
2. So cheaper than Vanguard FTSE All-World UCITS ETF (VWRL) at 0.22%.
Where did you get that iShares MSCI ACWI ETF contains only 5% Emerging Markets? Emerging Markets make up about 12% of the MSCI All Country World index, so I would expect the same proportion to be reflected in all ETFs which follow that index. So I don’t understand. In other words, whether ETFs follow equivalent MSCI or FTSE indices, the proportion of emerging markets in them should be the same order of magnitude, I believe, not twice as much in some vs. others.
The breakdown is on the i shares website https://www.ishares.com/us/products/239600/ishares-msci-acwi-etf
I don’t see the proportion of Emerging Markets indicated on that page. What I see is China 5.29% and Other 8.91%. I assume a big chunk of that “other” is the rest of Emerging Markets (and the difference mostly minor European countries), to bring up the 5.29% of China to a total of about 12%. Am I missing something?
@ David – I can’t verify more than the 5% China holding given the information iShares makes available and despite looking at it with three other tools. I suppose I could tally the 1500 shares listed in its holdings spreadsheet but I have my limits! I expect your right that some of the other will fall into the emerging markets category but I can’t verify that.
The article states:
“Income versus accumulation – All of our best global index tracker picks come in both flavours.”
SACC is accumulating, but I see no income version of it. Am I missing something?
https://www.justetf.com/en/find-etf.html?assetClass=class-equity&index=MSCI%2BAll%2BCountry%2BWorld%2B%2528ACWI%2529
Oops, I meant SSAC, not SACC!
SSAC is an accumulating ETF. It is interesting that the fees have been cut, maybe it will be renamed as a “Core” fund soon.
MSCI ACWI Index covers 85% of world stocks. FTSE all-world index covers about 95%. FTSE Global All Cap Index covers even more, but I am not sure what the percentage is.
MSCI treat South Korea as a developed country, FTSE treat it as emerging.
“MSCI treat South Korea as a developed country, FTSE treat it as emerging.”
This is of course totally the wrong way round! MSCI treat South Korea as an emerging country, FTSE treat it as developed. Sorry about that.
Am I the only one to feel increasingly uneasy about whether my pension is inadvertently supporting the internment of the Uyghur people in forced labour camps? It has been so much in the news. One of the problems with tracker funds is that there’s no chance to pick out a dubious company and say, “Yes, but not them…”. I know it’s been said before on Monevator that it’s not self-evident to tailor your investments to suit ethical principles…But I get the impression issues like climate change get rather more attention when new “ethical” funds are developed.
Possibly HMWO ETF should be in that table?
If not I’d be keen to know why not ( because I bought some of it )
HMWO doesn’t include emerging markets.
@ Charlie – Ah, no, you’re right. There’s no inc variation on that one. Thank you for spotting.
I’ve just come to this post from your “Best global tracker funds – how to choose” post.
I’m almost there! I’ve decided on index funds, chosen my asset allocation (for arguments sake lets say it’s 60/40 equities/bonds), and my Global Tracker (HSBC FTSE All-World Index Fund C).
Is there a single type of index fund that can cover the 40% bond allocation (in the way there is a single fund for global equities), or do I need to use a combination of bond funds?
This post lists: UK Government bonds of varying lengths/types, UK corporate bonds, Total global bonds hedged to £ (government and corporate), Global inflation-linked bonds hedged to £.
I’m looking to follow a passive “no-edge” investing style. Do I need elements of all of them?
P.S. I’m looking to diversify away from Vanguard, hence not just using a LifeStrategy fund.
If sterling bias in lifestrategy means people feel more comfortable to hold more equities, maybe that’s a good thing
How much does it stabilise vls vs holding bonds?
Great article again guys, it’s also nicely timed for me as recently made redundant but starting new job soon so looking to squirrel a £10k lump sum into a SIPP for 10+ years or more (I’m early 50s).
First time looking at SIPPs so wondered what people’s choices were for SIPP providers and what they would do with £10k. Will be able to rebalance a few funds once or twice a year.
Already pay a couple of hundred into a S&S ISA with Fidelity. So was looking to start a SIPP with either Fidelity or Vanguard due to what I’ve read about them but don’t have any preference yet.
Read articles here and elsewhere on Vanguard SIPP and SIPPs in general.
Possible funds currently on my SIPP shortlist:
1. VLS60
2. Vanguard target retirement
3. HSBC all world global tracker & a bond fund*
4. A small number of index funds or ETFs (probably max out around 4 or 5 due to the lump sum to invest) – not arrived at a mix yet.
* Only doubts are regards to bonds specifically gilts due to negative returns/higher prices so have thought of and mix of Vanguards investment grade bond & their global bond index funds then add gilts as negative yield deminishes.
Does anyone have any advice on pitfalls / tips / preferences / suggestions regarding SIPP provider or fund suggestions. Already looked at the cheap index funds article but wondered what would people choose or what has worked well for them.
Once again thanks for the great reads and everyone’s comments. Really enjoy reading all the posts.
@ Jonny – you don’t need UK corporate bonds, or indeed corporate bonds of any type.
Conventional bonds: Either global government bonds hedged to £ or UK gilts. Both not necessary. If you wanted to use a total global bond fund hedged to £ instead then no probs.
Global inflation-linked bonds hedged to £ – yes, I think this is a good idea and there are reasons why you wouldn’t necessarily just go for UK inflation-linked bonds to protect against inflation.
You might find these posts useful:
https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/
https://monevator.com/the-slow-and-steady-passive-portfolio-update-q1-2019/
https://monevator.com/how-to-protect-your-portfolio-in-a-crisis/
@ Bal – you’re in the right ballpark with all 4 of your options. The target date fund will require you to make the fewest decisions and the VLS is the next simplest. Simplicity is a powerful ally.
Global government bonds hedged to £ are a reasonable alternative to gilts. Corporate bonds will help you less when you need your bonds most – in a recession.
Vanguard are cheaper than Fidelity and would usefully diversify you into another provider. I haven’t tried their service but haven’t noticed any outcry either.
@The Accumulator – many thanks for your comments and wise words. I like simplicity as it means I don’t need to tinker as much. Personally I have no issues with going to Vanguard for the SIPP as costs look good.
Only thoughts were about the target retirement possibly changing asset allocations too quickly reducing returns but has the advantage of zero effort. Could do it manually using a couple of VLS funds but then I’m potentially needlessly giving myself extra effort by wanting a little more flexibility I potentially won’t need.
When setting up my ISA I originally intended to drip feed a couple of hundred monthly into a 60% global equity tracker / 40% bond fund. Initially I concluded VLS60 should give me approximately a similar return and was so curious about BlackRock MyMap I eventually experimented with a 50:50 split between VLS60 and MyMap 5. Both doing well with no effort, MyMap currently a little ahead but realise it could easily change.
If I go to VLS60 or Vanguard target retirement for the SIPP would it be wise to change the VLS60 fund in the ISA to something else such as my original plan 60/40 global equity (example: HSBC all world tracker) / global bond (example: iShares overseas gov index) to diversify or shouldn’t this matter much. Did potentially look at Fidelity multi asset allocator growth fund as another possible replacement for VLS60 in ISA if wise to change. Otherwise I’ll leave it be.
Thanks again for the comments and great articles.
If you’re going to retire with X% of equities, in my mind we could make that the first thing we buy in our investing journey while it’s cheaper and then buy the bonds (and any temporarily held equities) later
Because if you’re buying your retirement bonds from day 1 (beyond what you need for your risk tolerance) then it might not be the fastest way
@Matthew – interesting, not thought of it that way. So if you wanted to have an 80:20 bond / equity split at retirement would you need to work out your total investment input and then calculate it back to work out how much on the equities side to buy? Wouldn’t you have to also estimate the potential average percentage return?
So for example if you worked out your total monthly contributions came to £50k over 20 years having the 80:20 split would be £40k bonds : £10k equities?
So would you buy say a global equity tracker for £10k and then make regular monthly payments to buy either a UK gilts or global bond fund over the rest of the time until you’ve hit retirement?
I’m guessing you would also have to make a guesstimate on the realistic percentage return based on average past performance return (which may or may not happen in the future) – e.g. basic estimate of 10% per year?
One question: if you worked out monthly contributions, lump sum and guesstimated percentage return but didn’t have enough with your initial lump sum at the start how would you work out the formula for the equity / bond split paid in per month over each of the years?
Example: if you worked out your monthly contributions would be £50k over 20 years plus you had the same lump sum of £10k you know you wouldn’t cover the equities side with the lump sum at the start even before you add your guesstimated expected percentage return to the total.
Once worked out at the start I can see it could be fairly easy to track using a spreadsheet, if the actual returns for each year began to waiver your expectations you could correct the equity / bond balance for the year similar to rebalancing a two fund portfolio.
On the potential lump sum short fall issue would one possible simple idea be to just roughly work out the possible equities short fall and just buy the global tracker each month until you reach the expected amount then switch to buying bonds?
Is my thinking correct in what you suggest? I do like the concept in regards to getting the best return by buying equities when bonds are pricey.
@Bal – Its hard to be exact and with equities especially you can’t guarantee to not have a shortfall especially over short periods but you can at least like you say guesstimate what you’ll need as a minimum and start with that layer – and then from there if it is falling behind then tweak what asset split you buy. My thinking of equities being cheaper early on is more do with growth than p/e – i.e. I’m not saying bonds are expensive, just that they’re not expected to grow so fast, so the cheapest way to do the whole thing is but buying your fast growers asap as long as you can tolerate the volatility. If the equities outperform you can always sell it down a bit to buy bonds
Also for some situations I’m an advocate if the idea of equities in an isa, bonds in the sipp – since isas aren’t taxed on growth, but from the numbers you give I’d just sipp it all. Once I put so much into sipp that I was able to claim universal credit on getting some back! For those situations hold it in an is a first and be prepared to be out of the market, and be prepared to prove your contributions to hmrc
I think you’re talking about a declining glide path? So you might start out strong in equities say 80:20 and then move 2% a year from equities into bonds, so you’re 60:40 10 years later, for example. It’s worth bearing in mind that 100% in equities can be scary as hell when the market bombs.
@ Bal – Last time I looked, the Target Date Fund would have you 60:40 by the time you’re about 64:
https://monevator.com/vanguard-target-retirement-funds/
Take a look at the Vanguard website to see if the methodology has changed since.
If you think the eventual bond allocation of the Target Date fund is too high then you could always switch to a LifeStrategy fund later, and adopt your final static allocation e.g. VLS 60.
Re: ISA / SIPP – assuming they are both serving the same objective then its common practice to maintain your overall desired asset allocation across both accounts, though the individual accounts could take quite different approaches.
If you thought your SIPP was in danger of breaching the Lifetime Allowance then it probably would be advisable to overweight bonds here.
Still, it’s not a no-brainer to go 100% equities in your ISA because if you want to draw down on it and the market crashes, with all your bonds in the SIPP, that could cause a lot of headaches.
There are a lot of scenarios to think through and there isn’t one path to suit all. Your approach to inheritance tax is another factor, and SIPP vs ISA also changes your potential access to benefits.
Personally, I have a lot of cash in my ISAs which I’ll use up before I can tap into my SIPP.
In retrospect, I wish I’d kept approximately the same allocation across accounts because it maximises my flexibility. I’m in no danger of breaching the LTA either!
These might be helpful:
https://monevator.com/sipps-vs-isas-best-pension-vehicle/
https://monevator.com/how-to-estimate-your-risk-tolerance/
@Matthew – that’s really interesting thanks for the information. Example I gave was to see if I properly understood your suggestion. In reality I’m not sure I’ll have much more than the lump sum for now for the SIPP as paying what I reasonably can (a couple of hundred) into an ISA each month. As you say it’s small amounts so tax wouldn’t be an issue.
Following your last comments it’s occurred to me that may be moving the monthly ISA contributions to the SIPP to buy bonds in a year’s time but keeping what I already have in the ISA (and remember to keep the faith and close my eyes in times of high volalility). If in a year or two I have more to invest I wouldn’t need to think about moving the ISA contributions.
In two minds between Vanguard target retirement option which would start at 70:30 equity bond split for my retirement time or your suggestion which would start at 100% equities but would follow a similar pattern (by buying only bonds bit by bit) but could provide an overall larger return.
@The Accumulator – sorry I didn’t see your comments prior to my last message. Yep, could be very scary on a market crash and a lot to consider. Target retirement option also is still very tempting due to no thought required and
as you suggest I could always move it to a VLS60 if target fund overloads too much on bonds. Main aim of SIPP is to keep the lump sum separate for the long term to help supplement modest work pension when time comes approx 15+ years.
Main aim of ISA is getting best from what I can save to serve more mid term (ideally 10+ years).
Got modest cash savings for nearer future but this is getting nothing at the mo so would like to split in to an instant access dire emergency fund which remains not getting anything and find a home for a small pocket of cash for 3 – 5+ years to get some better return which could still be raised if really necessary.
Have thought about putting 3 years + cash into a more cautious fund in the ISA to get a few percent however most I’ve looked at return very little after taking away fund costs. Still looking around at the 0 -30 equity allocation funds for candidates but wondered if there are any other potential options. If not I’ll just keep it as it is.
@bal – essentially it’s like a steeper glidepath, steeper than target date would allow, for the very reason that most people couldn’t handle a 70 or 80% equities crash – you have to have a plan, mine is 1) faith that every crash has always recovered even if it feels “different this time”, 2) flexibility about when I retire and the standard of life I get, 3) not particularly dependant on it since I also have a DB pension and for me the sipp is more for fun. – you need more than being able to close your eyes – I watched every day of the crashes I’ve seen with cyborg emotional control – markets do recover for multiple reasons (people are forced to sell by margin/ active managers trying to look clever/ money doesn’t really have anywhere else to go but back into the market, the Fed has your back with QE, the underlying asset isn’t actually bad, etc) – as well as that everything already known is already in the price, nobody can time a crash or the bottom of it, etc
But having bonds and equities separate in a way does give you a little more control over what you’re selling if you are drawing down during a crash – but be mindful that asset allocation will drift
Also the only mathematical reason to hold back/ time a transfer from isa to sipp that would eventually happen anyway is if you’re going to cross a major tax or benefit threshold with a big sum – it’ll grow tax free until drawdown
@TA makes a good point about inheritance tax, but I believe it involves dying before 75, which I don’t plan to do – if you are somehow able to hold into life you can make back the tax with a few years of returns and you need to live 7 years after a gift. Dying is not a very tax efficient thing to do!
@bal – for cash I use premium bonds – nowt really to lose, just be realistic with expectations! Over time gives an averageish cash rate
@Matthew – thank you for the comments. A bit to think about. Need to decide fairly soon as lump sum not making anything.
My main thoughts are do I have a similar mindset in reality and ideally I’d prefer to add to the lump sum to buy the bonds rather than sell equities to buy bonds but I guess it’s not a big deal if I can’t I’d just need to re-evaluate the realistic potential outcome.
Must admit target retirement option would be less scary during a crash and is a very easy option. Would need to consider if this is more or less preferable against the increased total return.
Thanks about suggesting Premium bonds however they don’t look if they would produce me anything for my meagre short term cash as once it’s been separated from the dire emergency fund it’d be less than half the £10k where PBs start to provide some return. If it increases in the future PBs could be an option.
@bal – over a few years you’d expect a more average return from premium bonds – not guaranteed though of course! Do we really need to guarantee a 1% interest rate? With a guaranteed rate on normal savings you guarantee to never have less but also guarantee to never have more. The thrill factor has a value to it and the ability to change your life. Unlike cautious investment you won’t be hurt by any interest rate rises
I would also find rebalancing a painful thing to do, it might be worth having an automatic target date in that case
How about;
X% in target date
+Y% in 100% equities
So you just shifty up the gear a bit
@Matthew – thanks again for your suggestions. I’m coming round to your idea to split between the two.
Considering 4/5 of the lump sum in target date and 1/5 in 100% equities or maybe 3/5 target date and 2/5 100% equities and just let them both run without tinkering, just add to them both if there’s any new money. If the 100% equities takes a dive it’s not as big an issue.
I see your point about Premium bonds Vs savings/cautious investments. My only thoughts are when I’ve looked at an odds calculator for my chances with what I could potentially buy the chances would be very small of getting any return. I admit there’s still a chance and it could potentially be life changing without the risk of losing anything. Getting 1% for the small short term cash pot would be nice if I could get it.
This post made me realize something I hadn’t realized before, so thanks for that!
I hold iShares IWDA (so developed markets only) as my main world ETF, and supplement with EMIM for the emerging markets exposure (8% of portfolio). But now I realize this is not the same thing as holding a Total World tracker, even if the percentage of EMIM in my portfolio would be the same as the emerging markets percentage inside ACWI for example. The reason for this being the market cap weighting inside the index: as an example, even though the percentage of South Korean stocks in ACWI is only 1.9%, Samsung is the 14th largest holding in ACWI with 0.62% of the index. In contrast, in my 8% portfolio allocation to EMIM, even though Samsung represents 4.02% of that index, that results in a 0.32% exposure to Samsung in my entire portfolio. This could of course be increased by increasing my percentage of EMIM, but only at the expense of overweighting smaller emerging market stocks. So in a way, composing an index of developed markets and emerging markets together and then weighing by market cap ‘liberates’ some large cap stocks that just happen to be based in an emerging market. This is not the same as composing a portfolio of 2 separately market cap weighted indices. I’m tempted to think the single global index is the better choice because those large cap stocks such as Samsung must be making most of their profit in a global market anyway, so I wonder if they should be truly considered emerging. There is of course the valuta risk, political climate risk, etc that categorize their home market as more risky/emerging, but is this sufficient reason to be underweight these stocks relative to their market cap?
One of the reasons I chose IWDA as my core tracker is that it’s part of an ETF selection that has zero transaction costs with my broker, while ACWI is not. So until that changes I think the cost savings in transaction costs outweighs the details of the ETFs composition and I won’t be switching away from IWDA for the moment.
@The Accumulator, thanks for the comment, and links. I’ve been doing quite a bit of reading old posts.
When you say: “Conventional bonds: Either global government bonds hedged to £ or UK gilts. Both not necessary. If you wanted to use a total global bond fund hedged to £ instead then no probs.”
By “Both not necessary. ” I assume you mean one, or the other is fine, it’s not necessary to have both – rather than meaning that neither is necessary?
@Marnix, If you are trying to match world markets you are too low in EM. I just downloaded the IWDA data and ran a pivot table on the market values of the constituents. At first this gave about 8% EM, which struck me as odd, but then I noticed that Ireland was far too high. This was due to 2 ETFs, 1 for China, the other for India, being attributed to Ireland. Correcting for that lifted the EM allocation to 13%.
Vanguard VWRL also has EM at 13% if Korea is treated as Emerging.
@Marnix, sorry I should have said ACWI instead of IWDA in my previous comment.
Your comment on Samsung was interesting and not solely down to your underweighting of EM at 8% instead of 13%. I just checked the Korean holdings of ACWI, EMIM and VWRL. ACWI only contains 38 Korean companies and Samsung is 34% of these by market value. EMIM has 424, with Samsung at 28%. Going for separate funds (IWDA+EMIM) brings in a lot more smaller companies which dilutes the holding of the larger EM companies compared to holding ACWI. To match the weighting of Samsung in ACWI it would be necessary to increase the weighting of EMIM to SWDA from about 13/87 to 16/84. But as you say, that would underweight large cap developed. But maybe that would be more accurate anyway? VWRL goes far more into smaller companies than ACWI with lower weights for Apple, Microsoft, etc.
VWRL by the way has 138 Korean companies, with Samsung making up 32% and 0.57% fund weighting. The broader Vanguard All Cap index fund has 299 companies (closer to EMIM), with Samsung making up 28% and 0.49% of the fund.
Thanks for pointing all this out – it may help explain my observation that a collection of geographical trackers, weighted to the FTSE World index gradually drifts over time. It also looks as though I may be underweighting EM and probably other markets and probably overweighting large US. I need to give this some more thought.
Interesting read; thanks for your efforts. For new investors not wanting to put money into things like oil, clusterbombs, companies with dubious human rights records etc, any advice for SRI/ESG index funds which mimic the global market? Currently looking at Vanguard’s ESG Developed World All Cap Equity Index Fund, as this seems the closest to the above criteria, though options appear pretty limited.
@Slambers — Have a read of this. It’s a few years old, so fund specifics need updating, but the gist is on-point:
https://monevator.com/sri-investing-what-you-need-to-know/
Thanks TI, will have a look. I know it might not be perfect, and possibly just pointless virtue-signalling, but it would make me feel better that I’m at least making some kind of effort.
This article is absolutely right. An all-world equity index tracker is the only proven strategy that works in the long term, and the evidence is clear to prove it. My personal pension has had just one investment for the last 25 years — one of the funds mentioned above — and performance has been outstanding.
This bit scares me:
“Investor compensation – You’re covered for up to £85,000 if your global index tracker is based in the UK. But 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 fund manager goes bust and your money disappears. Stock market losses are not covered!”
I thought that if Vanguard (for example) went tits up I would get all my money back as it was held in shares (within a fund). But in reality would it only be £85000? Is so that seems a huge risk I haven’t seen considered before.
@Slambers comment #155 (an old comment at this point, I realise!): Vanguard does have an “ESG Global All Cap UCITS ETF” that covers developed and emerging markets, but only in distributing form (as far as I can tell). Shame they don’t have an accumulation version, and offer it as a fund rather than an ETF! Anyone know why that might be?
One thing you can do with a set of regional trackers that you can’t with a single global tracker is rebalance.
Is there any value in keeping a set of regional trackers that give you broad coverage and rebalancing between them periodically?
Please consider a analysis of world dividend and/or value funds/etf.
@TooMuchCake, it would be good to hear from someone who thoroughly knows what is covered by compensation.
My understanding is that it is normal for investment platforms/brokers to hold shares/funds in accounts completely separate from the business accounts – so your investments are still there if the business fails. However when you invest, and when you withdraw money, it goes through their business accounts so more than £85K is theoretically vulnerable for a day or two.
Can anyone confirm, or not?
@TooMuchCake @Jonathan B
The requirements are broadly similar across all EU (or ex-EU!) countries but the nuances are different in each, and I can only speak to the UK position.
Investment firms are required to segregate all clients’ assets – whether shares or cash – at all times, including intra-day. There are a lot of additional requirements around this in the FCA’s CASS rules, like having to reconcile their records with those of their bank or custodian. Their compliance with these rules is audited annually. So this is the real protection over your index fund’s assets.
The statutory compensation is just to protect against the risk of the firm failing to comply or if there is a shortfall (the insolvency practitioner effectively has first call – look up Beaufort Securities). But the chances of any large provider failing in such a way is negligible in my view.
This a hardy perennial amongst safety first investors
Do you parcel all your investments in £80000+ parcels only – all with different providers etc etc?
It becomes a little impractical at some point so a compromise is required
Where the individual investor sets that compromise level is matter of individual choice
Personally I stuck to major fund managers- in my case Vanguard and a major platform provider-Interactive Investor
Too big to fail or will be bailed out if worst comes to the worst?
With simplification and ease of management comes less safety
You pays your money and takes your choice
xxd09
Rebalancing shouldn’t be required in a global tracker – to be truly passive you let the market decide the geographic allocation, because we accept we have no edge.
So if US market tanks and UK gains (as share of world market) – so be it.
To re-balance would be an active decision.
@TooMuchCake (#159):
Many articles have been written about this and they usually tackle it from a legislative/theoretical perspective. IMO, this is by far the best practical (ie been there done that) post: https://fireandwide.com/asset-liquidity/
@TooMuchCake @Al Cam — I agree with Michelle (the author of that article). My personal view is I see very little downside on running at least two of everything for redundancy. (That is, two brokers, two fund management groups (so half a global tracker from Vanguard and half from Blackrock, if you’re passive) etc.
Admittedly I don’t currently run two SIPPs. I do aim to change that eventually. It’d be a hard-to-process nightmare scenario if any of the main pension providers *lost* their clients money *permanently* (Mad Max territory one would presume) but having access frozen for some reason, for some period of time, perhaps many months, is easier to imagine.
I advocate this redundancy not because failure is at all likely with the big platforms — it’s definitely not, in my view — but because the consequences of any failure would be huge.
https://monevator.com/assume-every-investment-can-fail-you/
@ Dan – there could be some value in rebalancing regional trackers, and a marginal cost edge (assuming you don’t lose it again on dealing fees). But you have to be very disciplined – it’s not always easy to rebalance into a market that’s in steep decline while another soars. In practice, it’s just a lot less hassle to let the global tracker take care of it.
Somewhat surprised to see no mention of IGWD (iShares MSCI World GBP Hedged ETF).
As a (mostly) passive investor I prefer to avoid speculating on currency fluctuations – and World equities are fundamentally tied to the dollar.
Anyone who doubts this should compare (for example) NYSE:URTH to (a) HMWO and (b) IGWD.
@TI (#168):
Low probability high impact risks are IMO always worth addressing; although often the required medicine is somewhat easier to prescribe than stomach – to mash up just a few metaphors!
I also think that in general extending redundancy beyond 2-offs gets both more complicated and/or expensive and probably also increases the overall probability of you being with a platform/vendor in the, albeit unlikely, event that it fails.
@ MJcross – I haven’t put any MSCI World trackers in the list because they’re developed world only rather than truly global. Perhaps I should, what do you think?
The consensus seems to be that there’s some diversification benefit to be had from overseas currency exposure on the equity side but it’s a crap shoot.
Still, there’s no expectation of profiting from currency movements with a tracker, so I don’t think it’s fair to frame exposure as speculation.
We’re not expressing a view on the pound versus a basket of foreign currency.
I can understand someone such as your good self wanting to hedge out the potential volatility but I don’t see it as an active or passive choice. More a personal preference or because it suits your financial situation.
@TA perhaps my perspective reflects being in de-cumulation: personally I hope to forego the potential Emerging Market element of the index in return for slightly less volatility. Similarly whilst exchange rate variations should (some say) be net-zero over a sufficiently long time period, that’s not much comfort when rates are poor just when one needs to organise a drawdown. I recall reading somewhere (possibly ‘Smarter Investing’) that we should not expect markets to reward us for holding currency risk, so to me it seems like ‘pure volatility’ that I can do without.
Maybe I’ll risk going further and say that even if you are still accumulating, being exposed to currency variations means that every time you put money in you’re not really buying ‘the index’: rather the index +/- some random factor. The random factor may average to zero over time… but it may not. I suggest that being a passive investor means buying the index – and that doing otherwise involves speculating whether one intends to benefit from it or not.
@Mjcross If you’re in drawdown now, surely the weakness of the pound against the dollar would be cushioning you from the current US tech sell-off if you were in a non-hedged global tracker? I.e less volatility?
@Stevey Bee – indeed it would on this occasion, but it could easily be the other way around. Why do you think so many bond funds are hedged?
@ Mjcross – yes, I can well understand in decumulation that cutting out a source of volatility makes sense.
Larry Swedroe referenced a paper that examined currency risk:
https://www.etf.com/sections/index-investor-corner/swedroe-benefits-intl-diversification?nopaging=1
Couple of interesting quotes:
‘The authors also examined the issue of currency risk. They first note: “Long term, currency has no intrinsic return—there is no yield, no coupon, no earnings growth. Therefore, long term, currency exposure affects only return volatility.”’
‘In terms of volatility, they found that, in all regions, currency risk had very little impact on long-term performance, whether or not it was hedged. Sometimes hedging reduced volatility; in others, it led to an increase.’
I disagree that currency hedging is somehow a purer form of passive investing per se. Passive investing embodies the principles of diversified strategic asset allocation, low costs, and recognising the futility of market-timing and performance chasing. It preceded the easy availability of currency hedged funds and I haven’t seen a school of thought emerge that equity exposure to currency risk conflicts with those principles.
Hedged global bond funds is a completely different matter though – then currency volatility can swamp the volatility-dampening purpose of government bonds.
To me sources of volatility are to be embraced or avoided in so far as they serve the goal of meeting our financial objectives. For example, equity volatility underlies the equity risk premium, which we’re all relying upon to give us the portfolio growth we need.
And as I say, I completely get why you would want to reduce volatility on the equity side in decumulation. Ultimately, you’re right not to expect to be rewarded for currency risk, and twenty years of sterling appreciation could affect a substantial portion of your decumulation phase.
Thanks @TA – my apologies because I hadn’t intended to sound *quite* so dogmatic about it (grin) and I can hardly claim any expertise beyond my own limited experience to date.
If the point applies during de-cumulation, do you think it therefore applies in ac-cumulation too? Seems quite comparable to me…
@mjcross — Volatility is a different proposition in de-accumulation versus accumulation due to sequence of returns risk. 🙂
How are Fidelity so cheap (relatively) if they are actively managed?
I am also a bit spooked by this!
“Investor compensation – You’re covered for up to £85,000 if your global index tracker is based in the UK. But 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 fund manager goes bust and your money disappears.”
Indeed most of my ETFs+Funds are starting with an IE ISIN, so I guess they are domiciled in Ireland. Maybe I will start to move them to GB equivalents.
On a different but similar topic – I had been trying to keep my holdings at individual platforms (eg iWeb, AJBell) at or around the £85k limit. Does this make sense or should I instead by aiming to keep my overall holdings of different fund managers (eg Vanguard, iWeb) below £85k (even if split between different platforms)? Many thanks
@ Mr Slow – Re platforms vs fund diversification – the scheme works for both. So if Blackrock blew up then the scheme would pay you max £85K. If your platform blows then that’s another £85K.
Therefore you could decide to keep £85K max in any given fund provider. And £85K max in any given platform.
In practice, very few people do this. Personally I subscribe to the TI method of diversifying between two of everything – fund providers and platforms. I could imagine a world in which it’s three but I actually don’t for two reasons:
As others have pointed out there’s a few safeguards in place before you’d resort to the compensation scheme. Specifically segregated client assets which can be sold in the event of bankruptcy – all those stock holdings, bonds etc still exist and have value that can be returned to investors.
Or, more likely, the platform / fund manager is taken over by another market participant to ensure continuity for customers and prevent widespread panic. This has happened in the past when stockbrokers have gone bankrupt.
In extremis, I could imagine a systematically important company being nationalised to prevent a panic – think Bank of Scotland during the Global Financial Crisis.
I think of the compensation scheme more as a backstop designed to inspire confidence in the market for retail investors. As opposed to something you’d realistically expect to bail you out if Vanguard went down in the biggest financial fraud in history. The chance of a disaster on that scale is highly unlikely.
What has happened though, is a stockbroker has gone bankrupt and it’s taken months and months for the regulator and administrators to sort the mess out. That’s bad news if you’re a decumulator who needs access to your money to pay the bills. That’s where TI’s ‘two of everything’ plan works. You’ve got a second source of funds in the event of your accounts being frozen while the finance industry sifts through the rubble of a poorly run company.
Picking up some ideas raised earlier (and the recent new article on FX charges), and adding in some new ideas, I propose the following as the cheapest way to get global equity large/mid cap coverage with two ETFs:
VHVG (dev world, large and mid cap) charges: 12bp
HMEF (emerging markets, large and mid cap) charges: 15bp
Assuming a 90/10 mix, the weighted charges are 12.3bp.
As HMEF is a distributing ETF (and there is no accumulating version), most platforms will make an FX charge on the dividends. The yield is 2.5%, so with a 1% FX charge, this is equivalent to a further 2.5bp pa. Including that, HMEF costs 17.5bp and the blended charge would be 12.6bp. VHVG is accumulating, so no FX charge.
This approach seems to capture most of the cost savings from using regional trackers, but with just two ETFs. That makes periodic rebalancing pretty easy.
I think VHVG uses the FTSE index, so includes South Korea. HMEF uses the MSCI index, which also includes South Korea. So, this does overweight on South Korea, but I can live with that.
I haven’t included any ETFs that trade in USD, because of the FX charge when you buy and sell them. That would wipe out decades of savings on getting the OCF a few bp lower.
Am I missing anything?
I’m not including small cap, because you almost always have to buy this separately, anyway. There’s WLDS, which is 35bp. Is there anything cheaper in global small cap accumulating ETFs that trade in GBP?
On second thoughts, perhaps better to pair VHVG with VFEG, to avoid the double up on South Korea. VFEG costs 22bp, which is a bit more than HMEF, but it is accumulating, so no FX hit on dividends. 90/10 VFEG/VFEM gives a blended cost of 13bp, which is only slightly higher than HMEF/VHVG.
It is about the same as the HSBC All-World OEIC, but buying that will mean higher platform fees on many platforms. Platform fees are often capped for ETFs.
It is a lot cheaper than VWRL (or the acc version, VWRP). 9 bp isn’t a lot, but it is £900 pa on an investment of £100k. £9000 if you hold for 10 years. Not peanuts.
“9 bp isn’t a lot, but it is £900 pa on an investment of £100k.”
Sorry, maths failure. Actually, £90. I’d still rather that be in my pocket.
Hey,
Thanks for this article.
Would you worry about having a decent amount in a single global ETF such as SWDA or would it be prudent to split between 2 or 3 different world index ETF providers e.g. one from iShares, Vanguard & Xtrackers?
thanks
Does anyone know of an ‘all world’ (i.e. developed and emerging markets) GBP hedged ETF or index fund?
I am aware of several options such as iShares MSCI World but these only appear to cover developed markets.
Have you looked on https://www.justetf.com/uk/
This launched last month:
Invesco FTSE All-World UCITS ETF GBP PfHdg (FWSD)
https://etf.invesco.com/ch/financialprofessional/en/product/invesco-ftse-all-world-ucits-etf-gbp-pfhdg-dist/trading-information
I have an ISA with Vanguard but have become frustrated to find that only the distributing version of many of their ETFs are available on their platform (e.g. VWRL for a global tracker but no VWRP). As stated in this post, accumulation versions do exist for many (most) of their ETFs it’s just that Vanguard don’t let you access them on their platform. I really don’t understand why they do this, but it means that I will be leaving them once I get my pot size above the cost benefit threshold shown in the monevator broker comparison tables. Just a heads up to others who might be considering Vanguard as this was something that I hadn’t noticed going in.
@TA #189
That link takes you to the Swiss website and ETF version.
Here’s a link for the UK counterpart (ticker: FTWD for the LSE-traded ETF, I believe): https://etf.invesco.com/gb/private/en/product/invesco-ftse-all-world-ucits-etf-dist/trading-information
Why not just reinvest the dividends especially as vanguard don’t charge you to purchase ( or sell). Simple
Is this an updated version for 2023 or a reposting of last year’s edition?
Hi The Accumulator
Thanks for this timely (for me) update.
In the table, you note the HSBC FTSE All-World Index Fund C but then in the Trustnet annualised return info the one shown is HSBC FTSE All-World Index Inst Acc – any particular reason/difference?
I note it is the C Acc version that is offered by ii.
Thanks.
I have the Invesco FTSE All world tracker LSE as FWRA. TER 0.15%?
@Tofudave — It was all updated as of yesterday.
Thanks @TA for the update to this super piece, which is an essential for investors tracking diversified equity indices. Two questions for you, if I may please:
1. For larger pots, the 15% US dividend WHT rears its head as a non-trivial issue. How would your thoughts in your article above play into dealing with that; and would you have any thoughts perhaps on the MXWS.L ETF option (which is swaps based, and so avoids the WHT, but which only tracks World/DM, rather than All World inc. EM), and which Finimus mentioned in:
https://monevator.com/investment-costs-how-low-can-we-go/ ? I see @Charles #90 mentioned WHT issues in the comments back in 2016.
2. Any thoughts on the merits of tracking FTSE All World over MSCI ACWI? I see Korea was used as an example of different indices covering different countries in different ways in the comments (@Marnix #151; @Naeclue #128, 129, 153 & 154; and @IvanOpinion #183 & 184).
@Martin #195
Thanks for the query. I’ve done some more digging around. It seems there are distributing and accumulating versions:
Distributing: ISIN IE0000QLH0G6. USD version FTWD; GBX version FTWG
Accumulating: ISIN IE000716YHJ7. USD version FWRA ; GBX version FWRG
Here’s the search link: https://www.londonstockexchange.com/search?searchtype=all&q=IVZ%20FTSE%20WLD%20UCITS%20ETF
@Curlew TVM for this, v helpful
@Martin
There’s also a hedged distributing version which TA indicated (though I only realised this when on the LSE site): ISIN IE000UJC4MR1, FWSD but, as might be expected with a hedged fund, a slightly higher OCF of 0.20%.