Explain it to a Golden Retriever – A Lifetime Investment (World ETFs Comparison)

Explain it to a Golden Retriever – A review of World ETFs

In 2019, I cycled over 4,000 km across Japan and didn’t wanted to leave (a few typhoons forced me to). One of the reasons is the Japanese architecture, especially the peaceful countryside and Japanese gardens 

Japanese people love minimalism and simplicity

In a lot of fields, as Steve Jobs said, Simple is Hard – making a  product like the iPhone certainly was

Yet, in Investments Simple is Easy

I spent part of my career analyzing Structure Finance products. Yes, the ones that  blew up in 2008 (I actually went into this field only in 2009 – to ‘clean up’ the mess)

Be alarmed when investments get complicated, if you can't explain it to a six year old....or a Golden Retriever

One of the biggest mistakes Investors made was taking things at face value – especially for very complex products while being remote from the place where these products were originated (I look at you, German Investors in US Subprimes

It happened, for example, when an Investor bought Assets that had the highest credit rating but didn’t quite understand and didn’t have the systems to analyze

Most of us don’t have access to sophisticated products but a lot of traps remain. Academic research and empirical evidence point to the fact that simple Investing Strategies (e.g. Index Investing) usually work best, are easily understood and accessible to anyone

What if you could only buy into ONE single investment and HODL?

Interestingly, when you speak to people that have been in the investment business for long time and ask them the above question (that by definition makes them think about their true beliefs and long term risks they understand and leaves short term speculation off the table)

With the idea that: 

  • They could only choose one passive investment for their personal portfolio
  • HODL (Hold On for Dear Life) and can only withdraw to fund their needs
 

The answer often is... a World Equity ETF

Sure enough, if we assume you can’t swap investments and can only withdraw to fund your living expenses, we’re taking out the biggest investment risk out of the equation – yourself and your emotions   

And in fact, wise investors often move from complex portfolios to this simple strategy as they realize that the market almost always wins in the long run

 

The Simplest Investment - A World ETF

Current country weights in the World Equity Index

You don’t need much knowledge to put your cash to work

In fact, to get exposure to World Equities you only need a single ETF 

And this exposure evolves with the markets as certain countries grow or decline in World ETF Benchmarks

Countries' Stock Market performance as measured by size

Currently, c. 60% of all World Stocks as measured by market capitalization are US Equities but it wasn’t always that way and…

It may not always remain so. While there are certainly reasons for the current allocations, imagine if China or/and India accelerated opening up (and transparency) of their Capital Markets (China’s current weight is only c. 5% in the Global Stocks whereas its GDP is 65% of the US GDP). The mix of Emerging Market sectors is getting interesting as well

How did the World ETFs perform? 

Let’s look at the Benchmark with the longest track record:

World ETF Benchmark Performance

World ETF Benchmark Total Return (1988-2020)

 

If you assume your investment horizon is 10 years…

… by investing $1,000 and keeping it for the entire 10 year period it would have on average returned c. 7% per year (after 0.3% fees) and your portfolio would have doubled (on average) during those first 10 years  

 

Cumulative Net profit from investing $1,000 in a World ETF over 10 years at moment of sale

The graph above shows the net profit at the time when you sold a 10-year World Equity ETF

e.g. portfolio worth $3,300 that is: $1,000 (initial investment) + $2,300 (profit) if sold in 2019 (so, invested 10 years earlier, in 2009)

Of course, if you held longer than for a decade,  the return would be closer to exponential over time given how compound interest works

Incurring losses was almost impossible

More importantly, as wise investors know, the likelihood of having a negative yielding portfolio was close to zero beyond a 10-15 year holding period

In fact, from 1988 to 2020 the likelihood was below 3% if you kept the portfolio for the entire 10 year holding period (essentially the only case was if you invested in 1999 and was forced to sell in 2009) 

Stoic Investor vs. Typical Investor

Maximum loss from last market peak on $1,000

And yet, this is a hypothetical exercise and assumes the emotions are not part of the game

If you watched your Investment Account at the end of every month (I don’t and managed to forget my broker account password recently, which I’m really proud of!) there would have been cases where losses would be close to or slightly exceeded 50% but this assumes that your reference point was the previous market peak

It’s not how one should look like at a portfolio but often investors do and that’s why portfolio protection is still key

Now, what are the practical arguments for such a radically simple Equity Portfolio

5 Reasons WHY you should buy it

#1 - The World ETF covers all countries and sectors

#2 - The World ETF follows the Money

The benchmarks that these ETFs track are market capitalization Indices. It means that the larger a country/sector/company gets the bigger will be your exposure – you follow how the best brains in Finance are allocating capital to the most productive companies, and this, worldwide

#3 - The World ETF is unbiased

You wouldn’t be over-exposed to countries (e.g. your own because of your arbitrary preference) and companies you shouldn’t be – again, you go with the flow

#4 - The World ETF is hassle-free

If your portfolio has multiple ETFs you have more rebalancing work and potentially tax implications. You also have to rebalance your portfolio whenever it drifts from your desired allocation. You can focus on more interesting things in life than ETFs

#5 - The World ETF is cheap

One ETF is cost-efficient and involves less transaction fees (no need to rebalance yourself and related trading costs)

5 Criteria that matter

How do I select a World Equity ETF?

Since, we’re in for the long haul let’s keep simple selection criteria simple as well (if something below isn’t clear – look here at what matters when selecting an ETF and here how World Indices work)

  • US INVESTORS !

The following section takes a European (UCITS) view - because for us Investing is more difficult. For comments related to US Investors (lucky you - with a lot more ETFs to choose from!) skip the next section and jump straight to the country tabs below to see the various options you have

Comparison of Best World ETFs

Key ETF Characteristics
  • Most funds track the MSCI All-Country World Index with the exception of Vanguard that tracks the FTSE equivalent and SPDR MSCI ACWI IMI that has the additional benefit of tracking Small Caps (click here to learn more about their performance)
  • All ETFs are domiciled in Ireland with the exception of Lyxor MSCI ACWI. Ireland may have the advantage of lower withholding taxes for US Assets that represent over half of the Index
Key Performance Metrics
  • I have ranked the 6 Best World Equity ETFs based Tracking Differences (understand why it’s key in ranking ETFs) 
  • Calculations from TrackInsight and TrackingDifferences do not yield the same ranking but the timeframes are not the same 
  • TrackInsight’s quality of analysis is likely superior and its ranking is recent and done in consistent time period (last 36 months). TrackingDifferences uses inconsistent timeframes (since inception for each fund)
  • The rankings are inconsistent for SPDR MSCI ACWI IMI (which uses a benchmark tracking small caps as well so not entirely comparable) and the smallest fund – Xtrackers (but this is explained by 2014-2017 underperformance)

WORLD ETF REVIEWS

Vanguard FTSE ALL-World
5/5
iShares MSCI ACWI
4.5/5
SPDR MSCI ACWI
4/5
Xtrackers MSCI AC World
4/5
Lyxor MSCI ACWI
3/5

Remember, the above is just a guidance based on the following criteria. However, Investing is individual and you should assess your own requirements

All have 3 stars for ticking the boxes with regards to my basic requirements. Tracking Difference remains my main criterion but size and brand name have a little impact, too

I didn’t rank SPDR MSCI ACWI IMI with the others since it’s more difficult to track small caps

Here is what you need to know about each Fund:

Vanguard FTSE ALL-World vs. iShares MSCI ACWI vs. SPDR MSCI ACWI

The US “BIG 3” rank well and all  have strong reasons to invest with. Until 2021, Vanguard clearly did stand out. However, with the recent drop in TER, BlackRock will be a serious challenger in the years ahead.

Vanguard FTSE ALL-World ETF

  • The Boglehead favorite ranks consistently at the forefront in terms of Tracking Difference – in fact, you hardly incurred any net costs (0.02% annually) over the past 36 months
  • Vanguard attracted most capital and manages c. 60% of all funds’ assets
  • Vanguard tracks the FTSE ALL WORLD Index which covers c.90% of the Investable Universe, that’s 5% more than its rivals that track MSCI ACWI 
  • Vanguard FTSE All-World ETF is also the cheapest using the TER metric with on-going cost of 0.2% (but as we know Tracking Difference is more important)
  • Vanguard gives the flexibility of reinvesting and distributing dividends 

iShares MSCI ACWI ETF

  • BlackRock has the strongest Brand Name among Institutional Investors and the biggest Asset Manager in the World in terms of Assets Under management
  • Up until 2021, the fund was the most expensive in terms of TER and didn’t rank that well in terms of Tracking Difference over the past few years. As of February 2021, I have upgraded it from 3.5 stars to 4.5 as a result of TER decreasing from 0.6% to 0.2%. This change is expected to bring Tracking Difference on par with Vanguard over time and will be re-assessed in due course.

SPDR MSCI ACWI ETF & SPDR MSCI ACWI IMI ETF

  • SPDR MSCI ACWI ETF is the second largest fund with c.$2 bn of assets under management
  • State Street also provides the option of investing in World’s small caps (ACWI IMI Index) – the only provider to allow this with UCITS ETFs (you would need to select the SPDR MSCI ACWI IMI ETF)

Xtrackers MSCI AC World ETF vs. Lyxor MSCI ACWI ETF

European ETF Providers may also provide you with reasons to invest:

Xtrackers MSCI AC World ETF

  • Xtrackers MSCI AC World ETF was established in 2014 and initially underperformed
  • However, more recently it has the second best Tracking Difference aka net annual provider cost of 0.13%

Lyxor MSCI ACWI ETF

  • If you have a particular tax incentive of having your ETF domiciled in Luxembourg (the only Fund since the other ETFs are domiciled in Ireland) you may choose Lyxor MSCI ACWI ETF
  • However, this ETF does not meet the criterion regarding physical replication – be sure to be familiar with how synthetic replication works. 

WORLD ETFs for US, Europe and UK

Click on your country to read about suggested ETFs including available Trading Currencies (see what Trading currency is)

  • US
  • EUROPE
  • UK

Recommended approaches:

  • US Investors have extensive options to buy US ETFs and supplement with International all-in one ETF
  • I have described these options here
  • However, if you wish a Total World ETF the recommended options that track MSCI ACWI or FTSE All-World remain Vanguard, iShares and State Street as described above 
  • The advantage that you have over Europeans is that you can include more easily small caps as well through Vanguard e.g. VT ETF that tracks FTSE Global All Cap

Recommended ETFs with available Trading Currencies:

Recommended ETFs with GBP as Trading Currency:

Everyone wants to 'Sin a little'

Of course, life is more complex than this simple example

Our Personal Finances are, well, by definition personal

We have emotions, we have dreams and objectives and may want to deploy savings in active ways like Real Estate or starting a business, to that extent we have the flexibility and the disadvantage (see the disastrous example here) to be able to sell at any time to pursue them

Most of us also want to ‘sin a little’ and  overweight some regions/markets (developed vs emerging) or sectors based on our personal views (and with my guide you have the possibility to do that easily)

With regards to your biggest enemy – emotions, you may also want to think about hedging your bets with Bonds. In the long run they will allow you to benefit from market crashes – even the most spectacular ones

Good Luck!

how to build an investment portfolio option 1

This guide explains the Equity Part of the Golden Retriever Portfolio – read here about how to set up the easiest Long Term Portfolio for goals such as Financial Independence

INVESTING GUIDES

GROW YOUR PORTFOLIO
Market Dashboard
INVESTMENT RESEARCH
COMPARE ETFs
PROTECT YOUR MONEY
UNDERSTAND BOND ETFs
INVESTING FAQ
READ ALL INSIGHTS
INVEST & CYCLE THE WORLD

DISCLAIMER

All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice

Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read the full disclaimer.


HAVE A QUESTION ABOUT INVESTING?

Drop it below or if you enjoyed my work and found it useful please do leave a comment or share it with someone that may benefit from it – I am grateful for your feedback

Note that this website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis

Good luck and keep’em* rolling!

(*Wheels & Dividends)

Raph

 

FAQ

The Boglehead favorite ranks consistently at the forefront in terms of Tracking Difference – in fact, you hardly incurred any net costs (0.02% annually) over the past 36 months.
Vanguard attracted most capital and manages c. 60% of all funds’ assets.
Vanguard tracks the FTSE ALL WORLD Index which covers c.90% of the Investable Universe, that’s 5% more than its rivals that track MSCI ACWI .
Vanguard FTSE All-World ETF is also the cheapest using the TER metric with on-going cost of 0.2% (but as we know Tracking Difference is more important).
Vanguard gives the flexibility of reinvesting and distributing dividends .

 SPDR MSCI ACWI ETF is the second largest fund with c.$2 bn of assets under management.
 State Street also provides the option of investing in World’s small caps (ACWI IMI Index) – the only provider to allow this with UCITS ETFs (you would need to select the SPDR MSCI ACWI IMI ETF)

 BlackRock has the strongest Brand Name among Institutional Investors and the biggest Asset Manager in the World in terms of Assets Under management.
 However, it is the most expensive Fund in terms of TER and didn’t rank that well in Tracking Difference in the past few years

 Xtrackers MSCI AC World ETF was established in 2014 and initially underperformed.
 However, more recently it has the second best Tracking Difference aka net annual provider cost of 0.13%

If you have a particular tax incentive of having your ETF domiciled in Luxembourg (the only Fund since the other ETFs are domiciled in Ireland) you may choose Lyxor MSCI ACWI ETF

The American “BIG 3” rank well and have all strong reasons to invest with them but Vanguard clearly stands out. The Boglehead favorite ranks consistently at the forefront in terms of Tracking Difference – in fact, you hardly incurred any net costs (0.02% annually) over the past 36 months. Vanguard tracks the FTSE ALL WORLD Index which covers c.90% of the Investable Universe, that’s 5% more than its rivals that track MSCI ACWI

• Only well-established names in the Industry.
• Minimum Fund size of $200m.
• Funds tracking ALL Developed & ALL Emerging Countries (if possible, also Small Caps).
• Only physical replication (because a Golden retriever wouldn't understand synthetic replication).
• No currency hedging.

1 - The World ETF covers all countries and sectors.
2 - The World ETF follows the Money.
3 - The World ETF is unbiased.
4 - The World ETF is hassle-free.
5 - The World ETF is cheap

From 1988 to 2020, by investing $1,000 and keeping it for the entire 10 year period it would have on average returned c. 7% per year (after 0.3% fees) and your portfolio would have doubled (on average) during those first 10 years

Historically, the likelihood of having a negative yielding portfolio was close to zero beyond a 10-15 year holding period

In fact, from 1988 to 2020 the likelihood was below 3% if you kept the portfolio for the entire 10 year holding period (essentially the only case was if you invested in 1999 and was forced to sell in 2009)

REACH FINANCIAL INDEPENDENCE SOONER

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RUI
RUI
6 months ago

Congrats for the article and website. Just bump into Bankeronwheels this week and still have a lot of reading to do from what I realise. Like very much the fact of the ‘European perspective’ that sometimes changes significantly the decision making process as well as the fact that you’re explaining to a ‘golden retriever’ but one that already knows how to read. 🙂

John
John
6 months ago

“Only physical replication (because a Golden retriever wouldn’t understand synthetic replication)”
Brilliant! 🙂

Ben
Ben
6 months ago

Can’t recommend this article enough

Jack
Jack
6 months ago

Hi Raph, great read as usual. I now use this as a benchmark article to recommend ETFs to my mates!

Thanks,

veekking
veekking
5 months ago

Great analysis. Like the performance chart by country chart since 1990, perhaps tells shouldn’t buy FTSE 100.

Olek
Olek
5 months ago

Fantastic article, reminded me that I’ve done good job selecting Vanguard FTSE All-World ETF as my main asset few years ago. Greetings from Poland!

Nikos Bozinis
3 months ago

are your figures for long term annualized returns (7%) adjusted for inflation?

Nikos Bozinis
3 months ago

do you have any figures INCLUDING inflation? Because it is an extremely important factor, no?

Federico
Federico
1 month ago

I think you made a mistake. The iShares MSCI ACWI ETF traded in Europe has a T.E.R. of 0.20%, (ISIN IE00B6R52259). https://www.ishares.com/uk/individual/en/products/251850/ishares-msci-acwi-ucits-etf

It is listed in EUR, USD and GBP in different exchanges.

The one listed in USA is more expensive.
https://www.ishares.com/us/products/239600/ishares-msci-acwi-etf

Maciej
Maciej
1 month ago

Federico, Raph thank you for the update 🙂 It looks like that we are slowly approaching phase where TD on ETFs would be by definition expected to be positive 🙂

Metro
Metro
1 month ago

Hello Banker on Wheels and other investors.

I have recently discovered the Banker on Wheels website. I think this is a useful article about global tracking funds.

Have you heard of the Vanguard FTSE Global All Cap Index Fund which invests in large, mid-size & small company shares in developed & emerging markets around the world, in over 6,800 stocks the ongoing charge is 0.23 and Vanguard 0.15% account fee.

The FTSE Global All Cap is an index fund. Are the ETF global funds much different and better long-term.