Impact of emerging markets on Vanguard ETFs

aroominyork

I have charted Vanguard's All World ETF (VWRD, in yellow) against the Developed World ETF (VEVE, in blue) and there is barely a cigarette paper between them. That suggests that emerging markets - the area within VWRD but not in VEVE - has tracked the global market, but when I add the emerging markets ETF (VFEM, in green) it clearly does not do so. Why is this - why doesn't emerging market performance make VWRD vary from VEVE?

A_T

aroominyork wrote: »

I have charted Vanguard's All World ETF (VWRD, in yellow) against the Developed World ETF (VEVE, in blue) and there is barely a cigarette paper between them. That suggests that emerging markets - the area within VWRD but not in VEVE - has tracked the global market, but when I add the emerging markets ETF (VFEM, in green) it clearly does not do so. Why is this - why doesn't emerging market performance make VWRD vary from VEVE?

VWRD is basically c. 90% VEVE with c. 10% emerging markets so not enough to make a significant impact overall.

dales1

Or look at VWRL for the same thing priced in sterling rather than dollars.

aroominyork

A_T wrote: »

VWRD is basically c. 90% VEVE with c. 10% emerging markets so not enough to make a significant impact overall.

Maybe not a significant impact, but there should be a 10% impact yet it looks much less than that.

dales1 wrote: »

Or look at VWRL for the same thing priced in sterling rather than dollars.

None of these are hedged ETFs. You are suggesting I compare apples with oranges.

Mr.Saver

If VWRD is made of 90% VEVE and 10% VFEM, and VFEM has only under-performed VEVE by 10%, then (ignoring rebalancing, management fee, etc.) VWRD should only under-perform the VEVE by 10% * 10% = 1%, does it make sense?

Prism

aroominyork wrote: »

None of these are hedged ETFs. You are suggesting I compare apples with oranges.

VEVE is in pounds whereas VWRD is in dollars. VWRL is the better comparision

aroominyork

Prism wrote: »

VEVE is in pounds whereas VWRD is in dollars. VWRL is the better comparision

If you chart VWRD and VWRL they overlay each other, and on HL's website they link to the same KIID. I don't think there's any difference between them. None of them are currency hedged.

bowlhead99

A_T wrote: »

VWRD is basically c. 90% VEVE with c. 10% emerging markets so not enough to make a significant impact overall.

This.

You can zoom in to the charts to see more clearly what is going on.

Take for example the two weeks from 5 November 2019, when Developed dropped something like 1.25% while Emerging dropped 4%

If you have 90% of your holding go down by 1.25%, your total holding will lose 1.1%.

Then if you have the other 10% of your holding go down by 4%, that's only about 0.4% of your total.

So in total you would expect to lose 1.1+0.4% or 1.5% total. The blended return of -1.5% is pretty similar to the -1.25% return you were getting on the major component.

QED:


Essentially the emerging markets piece is not making a huge difference in a case where the EM returns are broadly similar to the Developed returns and have a really small weighting.

Over the last 3 years, the annualised differential between EM and Developed has been about 3.5%. So the detractor from your developed returns by adding 10% EM instead of having 100% developed is about a third of a percent per year. After three years then, All-World lags Developed by about a percent. As your chart is fitting a 100% range (-20 to +80%) into just a few centimetres of computer screen, it's not surprising that a lag of 1% accumulating up over several years doesn't look very big.

Ignoring the ETF figures with their associated costs and charges, you could look at FTSE's own factsheet. FTSE Emerging has done 19% return in five years. FTSE Developed did 49% return. So the shortfall is 30%. Keeping the roundings simple, if you put a tenth of your money in something that gets you 30% less, you get 3% less overall. Unsurprisingly the All-World delivered about 3% less than the Developed (45.8% vs 49% is 3.2% lag ; the use of 'a tenth' above is simplistic).

Prism wrote: »

VEVE is in pounds whereas VWRD is in dollars. VWRL is the better comparision

Irrelevant when you are are using a charting site that rebases to pounds anyway.

If you want to compare apples with apples just use FTSE's own factsheets for the index that the ETFs are tracking.

link to FTSE site

aroominyork

Thanks MrSaver and bowlhead. I calculated VEVE*90% + VFEM*10% and it indeed comes out pretty close to VWRD.

dales1

Prism wrote: »

VEVE is in pounds whereas VWRD is in dollars. VWRL is the better comparison

Thanks Mr Prism, and dales. Hedged ETFs were never mentioned beforehand by anybody at all in this thread, so York is confusing himself about his apples and pears. If York wants to buy VWRD that's great. But he needs to understand the difference between dollar and sterling equivalents before buying (which was my first suggestion above).

bowlhead99

dales1 wrote: »

Thanks Mr Prism, and dales. Hedged ETFs were never mentioned beforehand by anybody at all in this thread, so York is confusing himself about his apples and pears. If York wants to buy VWRD that's great. But he needs to understand the difference between dollar and sterling equivalents before buying (which was my first suggestion above).

The difference is that they are priced in different currencies. Overlaid on a HL chart which rebases the values to sterling, they are the same, so no reason to use one rather than the other when graphing them against the Developed World tracker. He was not asking which one to buy, in any case.

The irrelephant in the room was your comment that he should look at 'the same thing priced in sterling rather than dollars'. This distracted from the fact that the chart he had produced was actually in line with expectation all along, after he had considered that the performance drag from the Emerging fund was minor because it was only a small component of the All-World.

dales1 wrote: »

Thanks Mr Prism, and dales.

As a reminder, it's Mr Saver, and Prism. You are dales, right...? :beer: