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Total world equity trackers 4 U

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 [1] champ Lars Kroijer has explained [2].

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

The issue is clouded by the usual fog of choice that swirls around every investment decision we make. As many Monevator readers have already noticed, there’s no ACME [3] total world tracker emblazoned with the blurb “Your problems are solved! Buy Me!” to make things easy for you.

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

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

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

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

Total world equity trackers – what really matters?

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

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

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

But notice that word above: practicable.

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

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

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

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

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

So, what matters:

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

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

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

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

But don’t sweat small changes in the cost pecking order. An Ongoing Charge Figure (OCF) [4] differential of 0.1% on £10,000 = £10. That will cost you £50 a year on a £50,000 investment if, for example, your fund’s OCF is 0.35% instead of 0.25%.

Only you know your personal hassle threshold, so try to work out whether the impact of costs [5] over your investing lifetime is worth switching for.

Take a look at tracking difference [6], too, as part of cost.

ETFs vs index funds [7] – If you’re only investing a few hundred pounds a month then plump for an index fund rather than an Exchange Traded Fund (ETF). Then you can choose a broker [8] that offers commission-free trades and avoid a nasty cost headwind. This is especially important if you want to invest monthly.

Investor compensation – You’re covered for up to £50,000 of loss if your tracker is based in the UK. If it’s based in Ireland – as most ETFs are – then you’re looking at €20,000 max. Note, investor compensation schemes [9] only kick in if your broker or tracker provider goes up in smoke and your money disappears. Stock market losses are not covered!

The index – You should Google the tracker’s index to make sure it’s total world or, if it isn’t, that you know what’s missing. Check your product’s factsheet [10] too.

To quickly check the difference between trackers then try this fund comparison tool [11]. (Sign up required). It lets the curious and diligent drill down into holdings, countries, market caps, sectors and performance. I’ve used it as the basis of the comparison table below.

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

Total world equity trackers – the rivals

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

Source: Funds Library

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

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

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

Other choices:

Read up on how to compare index trackers [12] if you need a refresher.

A world of difference

Funds-of-funds [13] – Technically Vanguard’s LifeStrategy fund [14] shouldn’t be in the table. That’s because Vanguard rebalances its asset allocation according to its own proprietary view rather than giving the market free rein. It’s also a den of home bias [15], with UK holdings three times greater than the other trackers in the table.

I’ve included it however because it’s still extremely well diversified and is a good UK based fund option. You can also buy LifeStrategy funds with a built-in government bond allocation. It’s truly a one-stop shop portfolio, as Vanguard handles all the rebalancing [16] while you get on with life.

Fixed income – Adding high quality government bonds into the mix is crucial if you’re not to freak out during a stock market crash. Understanding how to build your asset allocation [17] will help you work out how much you need to put in safer assets. You can find some leads on bond funds via our cheap index tracker [18] picks.

Income versus accumulation [19] – All the funds come in both flavours. Things are more patchy with the ETFs but concentrate on getting the right product first, don’t let the tail wag the dog.

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

KISS

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

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

But is that worth the time and dealing fees aggro?

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

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

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

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

Take it steady,

The Accumulator