Underweighting the US using index funds

aroominyork

I want to keep my US equity exposure under 40%. My core + satellite approach is pushing it over that level so is there a way to reduce index fund exposure to the US other than i) VLS, but that shifts the reduced US exposure to the UK rather than spreading it globally, or ii) buying several region-specific index funds? Vanguard FTSE All-World ex-US ETF (VEU) doesn’t seem to be sold in the UK.

ColdIron

Thing is, to make a significant difference to your existing portfolio you would need to add quite a lot of VEU even if it were available. If you added 25% of it's current value to VEU it would only reduce the US allocation to 32% and dilute the effect of your satellites to boot. Would you rip it up and start again?

underground99

As you've identified, if you want to use indexes and have less allocated to a particular region than a global index gives you, your choice would be to use an multi-asset fund that allocates to asset classes via indexes but has less in the US than a global tracker, or to simply build your own portfolio of index funds allocating less to the particular region (and more to one or more other regions) than the global index would give.

The current regional allocation of VLS is not a deliberately 'underweight US' allocation, more it is a deliberately 'overweight UK' allocation relative to the global index, which means you will get less US but you will also get less asiapacific, europe etc.  If you are choosing to allocate by region and it is only the US that you want to cut down on (because you have too much US in your satellites to be able to accommodate the US part of the global index in your core) but you don't also want to cut down on europe, japan etc, you would need to build your own portfolio based on region-specific funds.

Arguably the ethos of using an index for your allocation is to cheaply allocate capital to the places where everyone else is allocating capital because the market is probably right (until it isn't ) . The global index allocates more than 40% to US-listed companies for the same reason that the UK index allocates more to Tesco than to Sainsbury. There is simply more share capital available in free float according to current market values. If you reject the concept of using a capitalisation-weighted index to determine the allocations - in favour of custom allocations with caps or minimums on certain regions or industries etc - but you do want your individual building blocks for regions to still be allocated by index within those regions, you will need to use specialist regional index funds rather than generalist global index funds. 

csgohan4

Why not invest more in other satellites or EU/Pacific e.t.c either by new capital or selling off your US heavy funds?

Thrugelmir

What's the significance of a 40% allocation to the US market? 

george4064

Easiest way would to build your own portfolio using regional index funds, also gives you the flexibility to make any tweaks in the future.

NedS

If you are wanting to reduce US exposure to under 40%, this is presumably because you feel it is likely to under-perform the rest of the global market. So as you are taking a view, which markets do you think will outperform the US? UK, Europe, Japan, Asia Pacific, EM, everything? Just add a percentage of those indexes you think will outperform relative to the US alongside your global tracker to give you the overall weightings you desire. Holding around 2/3rds in a global tracker and around 1/3rd in other non-US funds will get you to the ballpark you are looking for.

aroominyork

Thrugelmir said:

What's the significance of a 40% allocation to the US market? 

It is not scientifically calculated. There are six investment regions - UK, Europe, US/N America, Japan, Asia Pacific, Emerging Markets - and I do not want more than half in a single region, especially given that, as dunstonh often reminds us, the same sector rarely tops the charts for two cycle in a row. A while back someone on this forum mentioned not having more than 40% in one region and that felt right to me so I adopted it as a rule of thumb.

JohnWinder

You may have a better idea about what you should do with your investments than I would have about mine, so I won't try to persuade you one way or another. But on this general point, not specifically '<40% US', Dahle has a list he calls '150 portfolios better than yours', and concludes 'A good investment portfolio is broadly diversified, low-cost, mostly or completely passively managed, regularly rebalanced, and consistent with its owner's need, ability, and desire to take risk. Every portfolio (except the Kiplinger ones) in this post meets those qualifications. Pick one you like, or design your own. Just don't go looking for the best one. As Prussian General Karl Von Clausewitz said, “The enemy of a good plan is the dream of a perfect plan.”'

https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/

Thrugelmir

In that case why hold global funds at all? Far easier to divide the investment regions up into your desired %'s. Then choose suitable a vehicle(s) to cover each segment appropriately.

VEU is offered to US investors to provide international exposure. A US investor being more likely to hold a core fund that tracks the Russell 3000 for example. Which provides a far broader spectrum of coverage to their home market. 

MX5huggy

aroominyork said:

Thrugelmir said:

What's the significance of a 40% allocation to the US market? 

It is not scientifically calculated. There are six investment regions - UK, Europe, US/N America, Japan, Asia Pacific, Emerging Markets - and I do not want more than half in a single region, especially given that, as dunstonh often reminds us, the same sector rarely tops the charts for two cycle in a row. A while back someone on this forum mentioned not having more than 40% in one region and that felt right to me so I adopted it as a rule of thumb.

This is quite easy to setup using Vanguard funds for each region, and total fees would be less than using the global options. The question is how often and on grounds would you rebalance? Say when one has 10% over your desired weight.