Creating a world stock portfolio with ETFs

SYTax

I'm looking to create a stock portfolio which matches the world stock market. I understand this can be done in a single ETF but this fees for this are too high (it essentially overcharges for the US market quite substantially).

I plan on using accumulation ETFs if possible as I will be investing a lump sum for the long term so do not want to waste time/fees reinvesting dividends myself.

My initial thoughts are something like the following:

• 53% - Source S&P 500 UCITS ETF A - 0.05% pa cost
• 25% - Source STOXX Europe 600 UCITS ETF A - 0.19% pa cost
• 9% - iShares Core MSCI Japan IMI UCITS ETF - 0.20% pa cost
• 4% - iShares Core MSCI Pacific ex Japan UCITS ETF - 0.20% pa cost
• 9% - iShares Core MSCI Emerging Markets IMI UCITS ETF - 0.25% pa cost

Total expense ratio: 0.1225%

My initial concerns are that:
1) I am overpaying for Europe slightly compared to Vanguard's ETF but I do like the idea of an accumulation ETF to save having to reinvest dividends.
2) The biggest gap in the above is Canada as I can't find a cheap ETF for this - although Canada is relatively small so this might not be a massive deal.
3) I'm a little concerned about the returns of the final two funds (emerging/Australia) - although I guess everything should be priced in!

Anyone got any thoughts/advice?

Sam_J12

It looks fine to me. Small differences in the price of funds won't make all that much difference in the long term so don't worry about a few hundredths of a percent difference in cost. Likewise, missing Canada or small parts of the global market is not a big deal. My biggest advice, which you are likely already aware of, is to choose a platform that does not charge for holding ETFs. This is one major advantage of holding a ETFs over an equivalent mutual fund.

SYTax

Thanks for the reply Sam. Agreed, I was planning on using SVS and this was the reason I went for ETFs rather than funds

_CC_

Is the Vanguard LifeStrategy fund not an option? Okay, the OCF is 0.24% so a bit higher than yours, but there would be nothing for you to do (re-balancing, changing the allocation etc.) and most platforms don't charge for fund dealings. For the sake of 0.1% it may be more suitable?

SYTax

_CC_ wrote: »

Is the Vanguard LifeStrategy fund not an option? Okay, the OCF is 0.24% so a bit higher than yours, but there would be nothing for you to do (re-balancing, changing the allocation etc.) and most platforms don't charge for fund dealings. For the sake of 0.1% it may be more suitable?

It could be - I think I will be going 100% equities so in theory my portfolio won't need rebalancing - as it starts funded by market cap so any increases/decreases in each fund will keep it funded by market cap (e.g. if US shrinks to 25% of market cap my portfolio should also reflect this). Unless I'm missing something on this?


The trading fees may be relatively similar - I will have to pay more initially with ETFs to get it set up but then nothing going forward whereas if I hold lifestyle strategy with Halifax it looks like it will cost me £12.50 p.a. within an ISA.


I suppose one benefit of vanguard is if I do want to sell a portion or add more it would be much simpler (with much lower costs).

_CC_

SYTax wrote: »

It could be - I think I will be going 100% equities so in theory my portfolio won't need rebalancing - as it starts funded by market cap so any increases/decreases in each fund will keep it funded by market cap (e.g. if US shrinks to 25% of market cap my portfolio should also reflect this). Unless I'm missing something on this?

The trading fees may be relatively similar - I will have to pay more initially with ETFs to get it set up but then nothing going forward whereas if I hold lifestyle strategy with Halifax it looks like it will cost me £12.50 p.a. within an ISA.

I suppose one benefit of vanguard is if I do want to sell a portion or add more it would be much simpler (with much lower costs).

What about future contributions?

What if the more volatile sectors, say emerging markets, did very well for several years and became a much larger proportion of your fund? Would you be okay with the change in risk to your overall fund (even though it will unlikely reflect the global economy)?

There are ISA providers which will charge a fairly low annual charge and then no charge for fund dealings. I think Charles Stanley Direct is 0.25% for example, but unsure on how people rate them on here.

SYTax

_CC_ wrote: »

What about future contributions?

What if the more volatile sectors, say emerging markets, did very well for several years and became a much larger proportion of your fund? Would you be okay with the change in risk to your overall fund (even though it will unlikely reflect the global economy)?

There are ISA providers which will charge a fairly low annual charge and then no charge for fund dealings. I think Charles Stanley Direct is 0.25% for example, but unsure on how people rate them on here.

I take your point on future contributions - that would certainly be an advantage of the Vanguard funds.


I suspect if emerging markets did become, say, 50% of the global market cap then Vanguard (who also tracker the global stock index) would have a similar proportion. Therefore it looks like in either case I would need to do some extra tweaking if I am not happy with this extra volatility.


With the numbers I have in mind (appreciate I haven't told you the amount) 0.25% p.a. will be a fair amount larger than the one-off costs of SVS or Halifax.

Thanks for your help!

TheTracker

Re 100% equities. Are you aware that over many time periods an 80:20 all world equity:bond split has achieved a higher return and lower volatility than either equities or bonds alone? Counter intuitive but true.

SYTax

TheTracker wrote: »

Re 100% equities. Are you aware that over many time periods an 80:20 all world equity:bond split has achieved a higher return and lower volatility than either equities or bonds alone? Counter intuitive but true.

Hmm.. agreed this is counterintuitive - I recall running some figures myself a while back for the last 100 years the returns/variance using various % bond allocations (admittedly this was done using the US stock/government bond markets where the stocks have done incredibly well) - my figures came up that 100% stocks vastly out performed 80% stocks rebalancing annually (although as you would expect has a higher variance).


Do you have any good analysis done which you can share which shows 80% stocks is higher return?


As an aside this portfolio won't be 100% of my savings, I have other savings in high interest current accounts (e.g. Santander 123 etc.) to smooth returns and give me some cash available. I've decided these returns (>3% p.a.) should be better than bonds, right? I suppose the benefit of bonds is the price of the bond also moves which is likely to be beneficial during a stock market crash as people move to safety.

bowlhead99

SYTax wrote: »

1) I am overpaying for Europe slightly compared to Vanguard's ETF but I do like the idea of an accumulation ETF to save having to reinvest dividends.

If you are investing say £100k, with 25%(£25k) to Europe, then an extra 0.05% charge is a little over a tenner a year.

If you receive a pile of dividends that you have to redeploy into the five funds, that would be 5x £8 at SVSXO, which is a lot more than a tenner a year from letting it accumulate - so arguably it is worth paying extra cash to get an accumulation etf instead of a distributing one.

However, if you were adding new money each year out of ongoing savings from your job or other income, then you are buying into all the funds at least once a year anyway, and the incremental cost of reinvesting dividends is zero and it is not really worth paying much extra for auto-accumulation.

However, it's perhaps worth noting that if you are allowing the returns from a market to be redeployed automatically into that same market you will get a different result to a global tracker over time.

A global tracker would receive 5% yield from Shell and 0% yield from Amazon and invest the total received cash across the total world markets in line with its global allocations. Using locally-accumulating funds, the Shell money will be reinvested into Europe and the Amazon money will be invested into USA. So, your portfolio will begin to diverge because of differences in average yields between your geographic pots. And then if you wanted to bring the allocation back into line with the 'true' world tracker position you would have to do some manual buying and selling.

Of course, as mentioned by others you might want to do some manual buying and selling if you no longer like the unrebalanced world tracker allocations anyway (e.g. the allocation to emerging or Europe or USA becomes too heavy for your personal preference). But if you do want to trust the world tracker allocations as the 'best' way to allocate, then be aware that your separate pots will be diverging from it due to the yield accumulation differences. And also the fee differences because USA is only having a small fee and Emerging is having a relatively large fee, instead of having (say) 0.2% fee on everything.

A final point on the use of Source vs Vanguard is that although it is cheaper, it uses a slightly different method to get to its end result. It holds a physical bag of assets but contracts with a financial counterparty to engage in total return swaps with the aim of ending up with a lower tracking error. See diagram at https://www.sourceetf.com/downloads/documents/SOURCE_SDJ600_FACTSHEET_EN.pdf

Whereas iShares and Vanguard aim to use only a minimal level of financial derivatives within their physical holdings. Ask yourself what happens if the counterparty to the swaps does a Lehman Bros and goes bust.

2) The biggest gap in the above is Canada as I can't find a cheap ETF for this - although Canada is relatively small so this might not be a massive deal.

You are right, Canada is relatively small, but at probably 3% of global developed markets it approaches that of Switzerland, Germany and is getting on for half of the capitalisation of UK.

As with anything you have a compromise on whether to include it or not. For what you are trying to achieve, you could simply use one all-world tracker and be done with it. However, properly including everything from around the world is a headache and so the ETF managers charge you a premium for doing it, i.e. the total cost of a typical world tracker exceeds the low fees (0.12-0.13% plus trading costs) for which you expect to be able to create your compromised solution.

3) I'm a little concerned about the returns of the final two funds (emerging/Australia) - although I guess everything should be priced in!

There is absolutely no point in saying that you want to build something that is weighted at all times to global market capitalisation because you have some scientifically researched thesis which tells you that is the very best way to do it, and then say you are concerned about the amount of money you would have to put into some parts of the world if you followed that strategy!

If you are concerned with that strategy, and want to instead disregard the global aggregate allocation and come up with your own strategy with a different allocation (just like most investors on the planet will do) to get a different result in terms of volatility, income yield, exposure to particular economic themes - then there is nothing wrong with doing that. For example the 'lifestrategy' product mentioned above, targeted at a UK audience, has a relatively higher weighting to UK-listed companies and lower to US. Some people would prefer to take a higher weighting to smaller companies instead, rather than only investing in $5bn+ companies as the 'world tracker' does. And so on.

You have already decided you do not want the average asset allocation of the average financial investor on the planet (which would probably be 70-80% bonds and loans and 20-30% equities) because you are not the average financial investor on the planet, and probably nobody else is either. You want 100% equities, it suits your needs better. So likewise if you don't want Canada due to impracticalities of buying it cheaply on a standalone basis, or you want less in emerging markets or Australia/ HK/ Singapore due to some innate nervousness around the returns there, feel free to adjust accordingly.

I think a useful thing to do is document your goals and rationale/methodology and decide where you'll be willing to compromise your principles to change the cost or the risk or the returns, then at least you have something you can look back on in a decade and see what was flawed about your eventual plan.

SYTax

Thanks Bowlhead - fantastic reply - it has given me food for thought.

Very good point on the dividends, I hadn't considered that and as you suggest it would grow the Europe allocation over time compared to the US. I'm thinking I may add some new money (though not as much as initially) every couple of years so this can tweak the ratios then.

Good point also on source. I may opt for ishares S&P500 instead for less risk of it going wrong. I can't seem to find a decent acc alternative in Europe so may stick with source for that one.

Agreed I'll ignore Canada and possible even Australia as the % allocation is small so the fees will be comparatively more impactful. I won't be matching the world entirely but it will be reasonable.

Thanks all for your help and comments