The simplest way for most people to own shares is via a global equity tracker fund. But what are global equities, never mind a global equity tracker fund?
London calling
Let’s take a step back. You’ll have heard of the City of London and the London Stock Exchange.
The London Stock Exchange is the market where shares listed for trade in the UK are bought and sold. The London Stock Exchange1 has been based in the City of London for hundreds of years. Today it’s all run on computers and in theory those computers could be anywhere. But they mostly remain in London, where hundreds of thousands of traders, accountants, lawyers, and others make their living from financial services.
The companies traded on the London Stock Exchange don’t have to be British, though they usually are. In many cases a lot of their revenues are earned overseas.
Think of a big oil company like BP. It’s a British firm but it makes money selling oil and other products all over the world. It’s the same with many of the other giant companies that trade on the London Stock Exchange – they earn around three-quarters of their income overseas.
Nevertheless, companies listed on the London Stock Exchange are UK-listed shares, by definition, because their shares trade in London.
A world of shares
Of course, the United Kingdom is not the only country with companies that people can invest in.
All developed economies have their own companies operating in various areas of business, from mining to manufacturing to retailing. The variety is endless.
It would be a simpler world if there was just one global stock exchange where shares in all these far-flung companies were traded.
But as things stand, there are distinct stock exchanges in different countries around the world. These exchanges facilitate trading in their own domestic shares, and often shares from smaller neighbouring countries, too.
For instance, another place you’ve probably heard of is Wall Street. (Or the least you’ll have seen the movie…)
Wall Street is home to the New York Stock Exchange – one of the major venues for trading shares in America’s listed companies.
Similarly, Germany has the Frankfurt Stock Exchange. Australia has the Australian Securities Exchange. And so on around the world.2
Deep breath! Stock market capitalisations
So, different countries’ exchanges boast different listed companies. As these companies do business over time they’ll achieve different results, which means different countries’ stock markets have historically delivered different returns.
That’s a lot of differences!
Also, the types of companies we’re talking about are not equally distributed around the world.
The UK, Australian, and Canadian stock markets have a lot of mining and energy companies.
In contrast, the US market is most notable as home to most of the world’s largest technology companies.
Another big difference between the various stock markets is their sizes.
The value of all the companies listed on a single stock exchange added together is called its total market capitalisation.
The UK stock market has a total market capitalisation of around $6 trillion.3 The New York Stock Exchange has a market capitalisation of over $20 trillion. Another big US stock exchange, the technology-focused Nasdaq, is over $10 trillion in size.
Clearly then, the total value of US-listed companies is much larger than the UK equivalent.
But as it happens the UK is still one of the world’s biggest stock markets.
Some exchanges are relative tiddlers. The Italian stock exchange, for instance, has a market capitalisation of less than $500bn.
The global stock market
If you add together the value of every country’s stock market, you get the global market capitalisation.
The global market capitalisation is the total value of all the publicly traded shares listed around the world, translated into a common currency (invariably US dollars).
The following pie chart shows each major country’s share of this global stock market pie:
The components of the total stock market capitalisation, as per December 2016.
Source: Credit Suisse Yearbook 2017 / FTSE All Share
You can see from the graphic that the US market makes up by far the largest portion of the global equity market. It’s more than half the total.
Japan is in second place, and the UK is in third.
Note that Britain is punching above its weight here. We’re the third largest piece of the global stock market pie, even though our country’s economic output is smaller than the likes of Germany or China.
This reinforce an important point – a country’s stock market reflects only the value of the companies that are listed on it, not necessarily that nation’s economic output.
Back in the day
When you invest in one the various global tracker funds available, you are putting money to work in each of these different stock markets with just one simple investment.
The big benefit is you’re immediately diversified across the world’s different stock markets.
The amount of money your world tracker fund allocates to each country usually4 reflects that country’s portion of the total global market pie, as indicated by a global stock market index.
The computers that run these market cap weighted funds don’t try to do anything clever. They don’t aim to predict which country’s market will do better next year, or which might be over- or under-valued.
But that’s not the handicap you might think, because most – professionals, amateurs, or computers – who do try to do so will fail.
Cheap and cheerful global trackers
Diversification across the global market via a tracker fund has three major benefits:
- It enables you to capture the average return from the global stock market each year.
- It protects you from suffering potentially very steep losses should your own country’s market do very poorly compared to the rest of the world. (Obviously you also give up the opportunity for big gains if your home country does particularly well).
- It automatically captures the waxing and waning of different stock markets over time.
These points are important because the investment returns from different markets have varied a lot, both in the short-term and the long-term.
By way of illustration, compare the snapshot in the graphic above of the global stock market – accurate as of 2016 – with the one below showing market share by country in 1900:
The global equity market as it stood 116 years ago.
Source: Credit Suisse Yearbook 2017 / FTSE All Share
Back in 1900, Britain made up the largest share of the global equity market. In contrast, the US, which now comprises more than half the total market, was just 15%.
This picture is always shifting, as economies and markets go through booms and busts, and investors’ appetite for different stock market’s prospects vary.
Another example: As recently as 1990 Japan made up the largest part of the global equity market, with a 45% share. The US was just 30% of the index.
How things change!
Key takeaways
We can now answer our initial question: What is a global equity tracker fund?
- Remember, equity is just a fancier word for a share.
- Global equities are the shares of all the different listed companies around the world.
- A tracker fund is a passive fund that aims to replicate exposure to some particular market.
- Because trackers are run by computers rather than expensive human beings, costs are kept very low compared to expensive active funds.
- This makes a global equity tracker fund (also called a world tracker fund or world index fund) a cheap and efficient way to take a stake in thousands of companies listed around the world.
We’ve other articles that go into deeper detail on global tracker funds, which you can read to learn more.
This article is one of an occasional series on investing for beginners. Subscribe to get our articles emailed to you (we publish three times a week) and you’ll never miss a lesson! And why not tell a friend to help them get started?
- Which is itself a public company, incidentally. You can buy shares in it! [↩]
- Fun fact: The company that owns the London Stock Exchange licenses its trading platform to other smaller exchanges around the world. For example the Mongolian Stock Exchange runs on the same core technology as London. [↩]
- Note: This and the market capitalisation figures that follow are per the latest entries in Wikipedia. They will be broadly inline in relative terms, but their dating is not consistent. See the pie chart below for more. [↩]
- I am over-simplifying here, and talking about standard or ‘vanilla’ global trackers or ‘market cap-weighted’ funds. Some non-standard funds may for example put a limit to the total percentage share allocated to any one country. [↩]
Comments on this entry are closed.
Morning all! Please remember these beginner articles are targeted at new investors (albeit ones with a lot of patience and a good dictionary, I’m afraid to say…) As such they do contain simplifications and so on.
Comments in that spirit are welcome as always, but this isn’t the article for discussing stuff that is liable to confuse a beginner investor. Thanks!
Morning TI, in the first graph, what does “Smaller Yearbook” and “Not in Yearbook” mean? Is that just a fancy way of saying “Other countries”? What’s the difference between the two? Cheers.
@Gaz — Morning! Yes, that’s basically it. As listed under the graphics, the data source is the most recent Credit Suisse Global Yearbook. They come in a couple of flavours, and one of their Yearbooks dives much deeper than the other. What isn’t in the Yearbooks is stuff they can’t get good data for, which are invariably smallest/newest markets. (From memory there used to be gaps for Russia, Germany and Japan due to the near wipe-outs of revolution/WW2 but they addressed this a few years ago. They may still differ from some in how they treat China, too, I can’t recall off top of my head. Follow the link next to “Source” for more info. 🙂 )
Great article. Reminds me of a conversation I once had that began…
Friend: “So, what are you investing in at the moment?”
X:”Oh, pretty much every decent company in the entire world….”
I am pretty new to the DIY philosophy. Recently retired, found the low cost platform and in the midst of transferring my SIPP. I have missed the boat on the massive increases in the market. With record highs in the stock markets is now the time to get in?
Whilst I am hopeful that I have plenty of “time in the market” to come, I am concerned about market timing too. Especially with my dearly beloved’s pension who might be less forgiving. So sit back uninvested and wait for a correction, get right in or the phased approach. Thanks in advance for your comments.
Ray, read this cheerful cove and tremble:
“Demographics will make the next crash, assuming there is a crash, much worse. But I expect something far worse than a crash: Slow torture.
Imagine a market where stocks decline 15% year-over-year, then rise 5%, drop 15%, rise 6%, drop 5%, rise 8% then drop another 12%.
With constant Fed intervention coupled with a Boomer need to cash out for retirement, and millennials sitting the whole thing out, such a slow torture scenario should not be far-fetched, even if you believe it unlikely.”
Nobody knows the future: nobody knows the extent to which the past may be a useful guide to the future. Probably the best you can do is diversify, keep your changes low, and avoid tax.
That’s a bit hypocritical of me though: we are heavy in cash. In the past we’ve done well in equities, and well in gilts. Now I’ve got cold feet.
I’ve just read Lars’ book where he suggests getting a global tracker. Looking around they seem to be 0.25% annual fee (VWRL from Vanguard), while their UK fee is 0.08, and I can get Japan and Europe trackers for 0.12 and even an Emerging country one for .2% from Blackrock.
So I’m inclined to make up a global tracker from a series of UK+Europe+Japan+Emerging+US, and halve my fees. Is there a more competitive global tracker?
@Ray — Ignore @dearieme’s un-sourced quote. Someone somewhere, probably important sounding, is saying that sort of thing literally all the time.
Here’s a hilarious recap of one I recently re-tweeted on Twitter: https://twitter.com/awealthofcs/status/873246275386396674
Occasionally it will be true, and some particular market will crash or maybe go nowhere for years. The US market has looked overvalued for years, and for years ‘smart’ commentators on this blog (and occasionally its ‘smart’ authors) have opined as much, and maybe even taken action accordingly. It’s kept marching higher.
That is not to say it can continue forever — we’re assuredly ever closer to the next inevitable bear market and 30%+ scything of a global portfolio, which will come along sooner or later — but it is to say it’s very very VERY hard to know when. Hedge fund managers (supposedly the smartest money in the business, paid tens of millions for their prowess) have as a group massively lagged the market over the past few years by being too bearish, for example.
What if it does? Off the top of my head a run of the mill 20% plunge in the S&P 500 would roughly get us back to the low point of early 2016.
The best advice for most people is to have a plan based around low cost index funds, invest regularly over 30 years, keep it up when the market crashes, allow re-balancing between markets and across asset classes (equities, bonds, cash etc) to trim a little automatically and keep your risk under control, reinvest dividends/income, and get on with your life.
As the old phrase says, “It’s time in the market, not timing the market, that counts.”
Perfect? No. But the alternative — “try to beat the market by suddenly knowing better than millions of other investors” — works for far FAR fewer.
I can’t give anyone personal advice so don’t take any of this as such. Caution is triply advised when you’re investing your pension, and you’re no longer earning. You may want to see a qualified and reputable financial adviser. Personally I think most retirees should have a big slug of bonds and cash, despite the “low” returns on such. It’s more palatable than the alternative of potentially seeing an equity over-loaded retirement pot smashed in the first couple of years of retirement.
We wrote about that just recently: http://monevator.com/getting-older-admit-it-when-you-rebalance-your-portfolio/
Have a dig around the site, there’s tons of articles on here. Ultimately you will need to make your own decisions — perhaps in conjunction if you need to with professional advice.
Whatever you do, don’t just listen to a stranger on the Internet who tells you it’s safe/unsafe to invest. 🙂
@John B — It’s 0.25% (!) for something that automatically tracks thousands of shares around the world. Surely your sentence should read:
Please don’t take this as a criticism as such, more a gentle ribbing. Obviously I’m an investing junkie too, we run our S&S passive portfolio out of components, as does @TA with his own investing.
I was just struck reading your comment how far we’ve come, perhaps without realizing it. 🙂
Excellent introductory article.
Like John B I’m struggling to find a world tracker that will save me having to juggle six cheaper regional funds and stop worrying if when/if I ought to rebalance them – but I take your point, TI: the minor extra cost is probably justified by the hassle it would save. First world problems!
One minor point of pedantry: “Another big US stock exchange, the technology-focused Nasdaq, is over $10 billion in size” – should that say “$10 trillion”?
@CC — That’s not pedantry, that’s an embarrassing typo! 🙁 Thanks for highlighting, have fixed it now.
As for the hassle of owning six funds versus the market, I want to stress again I am absolutely not having a shot at @JohnB or anyone else who goes down this route. I just found his world weary sort of tone as I heard it (in his comment) funny/provocative.
I currently have well over 50 holdings of various sorts (shares, trusts, tracker funds, weird bits and bobs) plus numerous other P2P accounts and so on. And that’s after a massive simplification a few months ago as I decided to take things relatively easy for a few months! So six passive funds sounds like hibernation to me. But as regular readers will know, I am deep in the active investing badlands. And I don’t recommend it, unless it’s a passion/hobby/job. 🙂
The average person just looking to invest for the long term for their retirement, say, is blessed beyond their understanding by the easy availability of 0.25% charging global tracker funds these days.
Ray,
No one knows what’s going to happen to equity markets so now is always the best time to start investing. It’s time not timing that will make your returns.
If it’s going to keep you up at nights then ‘drip feed’ your money into the market each month. But start now.
Thanks for sharing. The US’ market cap will continue to get smaller. Emerging markets like China and India will continue to get bigger over time. I just don’t see how it’ll be any other way!
@TI A big thank you to you and to your team for running such an excellent website!!
After reading your articles for a few months and watching Lars Kroijer’s youtube videos, I’ve finally decided to take the plunge and started to put a side a *very* small amount of money every month into the Vanguard FTSE Global All Cap Index Fund via a S&S ISA – just to have a feel of what it’s like to invest.
I was wondering how a global index tracker would behave in the kind of scenario that Tim Kim is talking about. Would the “index” that the fund is tracking start to ignore US stocks as the US market gets smaller and include more of China and India stocks as their markets grow? The fund would then buy or sell stocks according?
Many thanks!!
@SheepDog – If the US market goes up or down by 50% (or any other value), then an index tracker doesn’t have to buy or sell stocks. The stocks it owns will go up or down in value so there is not adjustment needed. It doesn’t have to “ignore stocks” or buy more of China and India if they have gone up while the US has gone down.
Of course if you look at your index tracker you might see that US stocks were 40% of the value last year, and they are 60% this year, but that is just due to the increase in the value of the stocks, not due to buying more stocks.
Re “The US’ market cap will continue to get smaller”. The US market cap has been consistently growing and also becoming larger as a share of global market cap. Not getting smaller.
It may seem puzzling why the VWRL All World tracker has a charge of 0.25%, when you can get separate Vanguard trackers cheaper.
I’m guessing that a large part of it is due to the size of the funds. You can see that the bigger the fund, the lower the charge tends to be. For instance the VUSA fund is more than ten times bigger than VWRL and less than a third of the cost. Curiously VMID is a bit of an outlier, being the smallest fund that I looked at, but almost as cheap as VUKE which is 6 times bigger.
VWRL $1.2 Bn 0.25%
VFEM $1.2 Bn 0.25%
VMID £0.4 Bn 0.10%
VUKE £2.5 Bn 0.09%
VUSA $17.9 Bn 0.07%
The likelihood is that the VWRL costs will come down as the fund grows in size.
I am always confused by the declared charges of fund of funds type things. I assume that the OCF excludes the cost of the underlying funds/ETFs whatever. So not sure it’s wise to compare declared fees per se.
On another point, if the world tracker says 8% weighting to UK, is that based on LSE market capitalisation? So if it’s the FTSE all share, a large part is global. Anyway of finding out how much really?
@Andy when creating a world tracker, you track a particular index, and follow their rules (and pay them commission for using their name). Those index generators could start with total market capitalization, or buy into markets based on that country’s GDP. But you could be observing a bubble in values, or not accounting for the importance of the market. The US and UK market caps are 150% of GDP, France is 95%, India 75%, so how much of each country do you want. I suspect that as India and China’s economies grow, their markets will gain influence against the US ones, and a global index will follow that trend
http://www.ftse.com/products/indices/geis-series explains how the FTSE generate their indexes, but I stopped reading the detail
While we are on the topic of passive funds and fee levels, I am concerned about:
– Forced events triggering tax charges (for example a passive fund is withdrawn in X years time and I am then stuck with a hefty Capital Gains Tax charge, or the fees increase a lot on the fund and I’m a fund prisoner).
– Rebalancing a number of funds (say 6) to save on fund fees (as per example above), but this in itself can trigger tax charges and/or use up valuable tax allowances (e.g. Capital Gains Allowance).
All the active investment (in individual securities) are and will continue to be confined to my tax-wrapped accounts as there is no tax implication on the gains (or losses!) from the underlying individual securities when buying/selling.
Ideally, I want to buy and hold only passive fund(s) in my non-tax wrapped accounts and never be forced to sell them. If I can do this, I can then grow my (non-tax wrapped) wealth whilst ignoring Capital Gains Tax.
I could just go “all-in” on VWRL, but I’m then a complete hostage to Vanguard keeping that index fund (and the fee staying at 0.25% or lower).
Should I go with 5 funds, VWRL plus 4 other rough equivalents to mitigate (if one of them is withdrawn, the forced event is likely to result in no or a much reduced Capital Gains Tax charge).
What about manually rebalancing a selection of passive funds (e.g. different asset classes). Does anyone here do that but then deviate from s strict allocation percentages to avoid using up their Capital Gains Tax Allowance (or avoid a Capital Gains Tax charge).
Someone reading this will have thought about this problem before. I’m pretty sure someone will have encountered it.
Does anyone have any good information on the longevity of passive funds and how often they are withdrawn?
Do funds ever close down, sold up and you are sent a checque? All I’ve ever seen is funds merging with other funds.
For CGT its much easier to switch from only buying a fund to only selling it, as the CG is straightforward. Trickling money in and out makes it a nightmare. I try to sell from 2 unwrapped funds a year, and either spend the money or put it into an ISA in whatever is underweight. This year the sales will be a little Europe with a very high %age gain and more FTSE 100 with a smaller %age gain.
@TI Thanks for the yearbook explanation!