US Equity index fund vs Global All Cap index fund with Vanguard

Marcusian

So i am investing a (relative) rate of knots in the US Equity Index Fund with vanguard, at the time I did this purely on the low costs. 

I am thinking of switching to a more global fund - the All Cap fund. 

However, my reasoning for not doing so is that 60% of the global all cap fund is the US anyway, and while an American downturn would hit the US Equity far more, it would also hit the Global Fund (60% of it anyway). I totally get how i am 'all in' on the US via that fund, but I guess I don't see a huge difference?

I see it that the US Equity Index fund is only 0.10% fees against the 0.23% - is this increase in cost worth having 40% of the fund more globally diverse? 

I am likely overthinking this, but I am about to invest around 18k to fill my ISA for the year, then just leave it and not check it, so best to get the right fund now I guess.

underground99

Let's say the dollar depreciates in value while US equities fall so the US index measured in sterling is down by 50% while Japan is only down 20%, UK is down 15%, rest of Europe 10%, Asia Pacific and Emerging markets are flattish.  

Your choice to have all your eggs in the US basket, rather than 55% in the US via a FTSE all-world tracker, would see your value drop by half on all your money rather than only on 55% of your money and suffer the milder losses on the rest.  But you wanted to save a little over 0.1% a year, so you stuck with the US index.

HSBC's FTSE All-World index has OCF of 0.13% which is pretty similar to the 0.10% you're paying.

MaxiRobriguez

The difference in cost between the funds is £23 a year. 

Don't let the tail wag the dog.

Pick the fund based on whether you want the additional diversification or if you want to concentrate in the US.

Marcusian

Yes both very good points, I want the global diversification, so will do so. 

older_and_no_wiser

Good points for discussion!

I am fairly new to fund investing and still learning the ropes, but I would say if they are both index tracker funds, should the 'balance of power' shift from the US to elsewhere in the future, the global index fund would reflect that and the companies in that fund would change to those in other countries. They may also change in the US tracker fund, but only change to other US companies which are performing better.

I've had the same issue with choosing my funds. I want to diversify but so many tracker funds are very US focussed... simply because the US contains the best performing companies.

On costs; I would say don't get too hung up on that unless there's a massive difference. The funds past performance (5 years+ if possible) and your gauge of possible future impact after some research should be the deciding factor. Also how it fits into your overall strategy.

Finally, I agree you should leave the investment as long as possible. It's a marathon not a sprint. You will see better returns by leaving it to grow and all dividends etc should be reinvested into the pot (accumulating funds).

I may be completely wrong, so happy to be corrected by more experienced forum folk.

Thrugelmir

swleventhal said:

I am fairly new to fund investing and still learning the ropes, but I would say if they are both index tracker funds, should the 'balance of power' shift from the US to elsewhere in the future, the global index fund would reflect that and the companies in that fund would change to those in other countries. They may also change in the US tracker fund, but only change to other US companies which are performing better.

Shift to which countries?  Global indexes are in essence sanitised and filtered. Likewise the market capitilisation of the US monoliths is so large. That there would have to be an explosion in global growth for other companies to even start getting close to them. 

older_and_no_wiser

Thrugelmir said:

swleventhal said:

I am fairly new to fund investing and still learning the ropes, but I would say if they are both index tracker funds, should the 'balance of power' shift from the US to elsewhere in the future, the global index fund would reflect that and the companies in that fund would change to those in other countries. They may also change in the US tracker fund, but only change to other US companies which are performing better.

Shift to which countries?  Global indexes are in essence sanitised and filtered. Likewise the market capitilisation of the US monoliths is so large. That there would have to be an explosion in global growth for other companies to even start getting close to them. 

Well yes I agree the US is huge in stock and company terms. But hypothetically in, say, 50 years, China (or Generica) may overtake the US and produce some mammoth size companies. If this happens, then those companies would replace the US companies in the global tracker? It's how  indexes like the FTSE operate surely?

george4064

If you are holding a single fund portfolio then definitely switch to the Vanguard Global All Cap fund.

Alternative is to build your own global equity portfolio, including retaining the US equity index fund you already hold.

JohnWinder

I'll go along with most of that, except perhaps the sanitising part. But a couple of observations...

I've struggled to find where HSBC report their tracking error where they try to follow an index closely. I've seen 'we try to keep within .2%' or similar wording, and I suppose they mean /year, but what they actually achieve is important. Vanguard make it visible, and it's more like .02%/year.

swleventhal said:

On costs; I would say don't get too hung up on that unless there's a massive difference. The funds past performance (5 years+ if possible) and your gauge of possible future impact after some research should be the deciding factor. Also how it fits into your overall strategy.

Finally, I agree you should leave the investment as long as possible. It's a marathon not a sprint. You will see better returns by leaving it to grow and all dividends etc should be reinvested into the pot (accumulating funds).

No need for us to be vague or unsure of the impact of costs. Just plug the figures into a compound interest calculator and see the impact. Starting with £1000, and adding £1000/year, an equity fund returning about 5%/year for 40 years will give you about 5% less of the gains if you pay an extra 0.13%/year in costs.

Funds past performance? Ignore it as much as you can, I'd say. Performance over a 5 year period, completely ignore it. Past performance is not a prelude to the future. That's a generalisation that is on every investment product for a good reason, and for a recent example have a look at the comparative returns of US large stocks vs other country stocks; that sort of performance is unlikely to continue for 40 years which is our investment horizon. Better to choose the right index and an appropriate fund for your needs based on index and fund intrinsic qualities.

Your gauging of something after research? Not sure what that means, but active fund managers pour fortunes into research and they finish up with returns that don't beat the market.

Thrugelmir

swleventhal said:

Thrugelmir said:

swleventhal said:

I am fairly new to fund investing and still learning the ropes, but I would say if they are both index tracker funds, should the 'balance of power' shift from the US to elsewhere in the future, the global index fund would reflect that and the companies in that fund would change to those in other countries. They may also change in the US tracker fund, but only change to other US companies which are performing better.

Shift to which countries?  Global indexes are in essence sanitised and filtered. Likewise the market capitilisation of the US monoliths is so large. That there would have to be an explosion in global growth for other companies to even start getting close to them. 

Well yes I agree the US is huge in stock and company terms. But hypothetically in, say, 50 years, China (or Generica) may overtake the US and produce some mammoth size companies. If this happens, then those companies would replace the US companies in the global tracker? It's how  indexes like the FTSE operate surely?

Google MSCI.  They provide explanations as to how their indexes are compiled. A little more complex than many assume. Not least that standards of corporate governance vary widely. As for China, the removal of Jack Ma from public view says it all. There is only one master, the party. 

Herbalus

underground99 said:

Let's say the dollar depreciates in value while US equities fall so the US index measured in sterling is down by 50% while Japan is only down 20%, UK is down 15%, rest of Europe 10%, Asia Pacific and Emerging markets are flattish.  

Your choice to have all your eggs in the US basket, rather than 55% in the US via a FTSE all-world tracker, would see your value drop by half on all your money rather than only on 55% of your money and suffer the milder losses on the rest.  But you wanted to save a little over 0.1% a year, so you stuck with the US index.

HSBC's FTSE All-World index has OCF of 0.13% which is pretty similar to the 0.10% you're paying.

Depends where you hold it of course. I have the global all cap fund but as I’m relatively new to the journey so platform % charging is cheapest for the time being, going on the vanguard platform at 0.15% gives a 0.1% saving over other platforms that charge 0.25% platform fee where I might benefit from a saving on the fund itself.