Underweighting the US using index funds

Prism

JohnWinder said:

I wouldn't say a reduction of 17% is just noise. And if you can manage your own simple, market tracking portfolio, it's free money. Getting better returns from VLS80, than VLS60 isn't free money, it comes with more risk.

A collection of regional index funds in the desired weights is likely a bit cheaper than an all world index fund assuming there wasn't a significant charge for rebalancing.

MX5huggy

Prism said:

JohnWinder said:

I wouldn't say a reduction of 17% is just noise. And if you can manage your own simple, market tracking portfolio, it's free money. Getting better returns from VLS80, than VLS60 isn't free money, it comes with more risk.

A collection of regional index funds in the desired weights is likely a bit cheaper than an all world index fund assuming there wasn't a significant charge for rebalancing.

Yes I looked at building VWRL from components. Worked out about half the price 0.11 vs 0.22. The only bit you pay 0.22 for is emerging markets. Could make it marginal cheaper by splitting out the Uk from Europe. In the end decided it was not worth the hassle for my small investment.

Alice_Holt

aroominyork said:

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.

      This looks at the historical performance of the US and UK market: 
       https://monevator.com/us-versus-uk-shares/

Thrugelmir

Alice_Holt said:

aroominyork said:

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.

      This looks at the historical performance of the US and UK market: 
       https://monevator.com/us-versus-uk-shares/

The US being an an emerging market over much of the period a fact which easily gets overlooked. 

Sebo027

aroominyork said:

AlanP_2 said:

aroominyork said:

AlanP_2 said:

So, what are the advantages of a cap-weighted index fund v an equal weighted index fund which are the most obvious direct comparators?

You seem to be comparing apples and pears. A cap weighted fund invests across a range of indexes. If you like small and mid caps, it might hold too little of them for your liking – Vanguard FTSE All Cap Index Fund invests (by Morningstar’s allocations) 17% in mid caps and 4% in small caps. An equal weighted product, by contrast, allocates an equal amount to all the companies within a single index, the most typical example being an S&P Equal Weight ETF (XDWE, although Morningstar mistakenly calls it XDEW), where you will invest as much in the smallest S&P constituent as in Apple.

I don't think I am, as I am talking about comparing at the Index level (I should have made that clearer).

Your S&P Equal Weight v a S&P market-cap weighted index for example.

Both are passive strategies (after making the management decision about which to choose) that will track the Index so why is one inherently better than the other?

OK, gotcha - I misread. It's an interesting question whether there is a theoretical basis for whether S&P500 or S&P500 equal weighted will, costs aside, outperform over time. Not one I can answer. But here is their performance since 2014: cap weighted in blue, equal weighted in red.

Interesting graph. Here's a similar one over a longer period of time:

Though another important point to note is, for broader indexes, the deviation is less pronounced (see below): 


Taking, for example, the MSCI World index - I suspect the price of an equally weighted ETF may have slightly higher fees that might level out the 0.24 difference in performance. I also can't find an equal weighting ETF that tracks this index, though admittedly i haven't tried too hard.. 
See links:
https://www.solactive.com/wp-content/uploads/2018/04/Solactive-Equal-Weighting-vs.-Market-Cap-Weighting.pdf
https://www.lynalden.com/equal-weighted-index-funds/