Spreads on All-World ETFs

easysaver

I've been comparing accumulating all world ETFs to decide which to invest in. There are only six options according to Just ETF (https://www.justetf.com/uk/how-to/invest-worldwide.html).
I'm trying to minimise costs which restricts me to ETFs because of my broker pricing otherwise I'd not hesitate to invest in HSBC FTSE All-World Index Fund C with its low 0.15% TER and no buy-sell spread.
I'll be hit with dealing costs, but these can be minimised with larger trades. Choosing an ETF with a lower TER is a no-brainer and I'm aware of internal transaction costs (Monevator are good on this) but assume these are minimal in the scheme of things. That leaves me with the spread when trading. I assumed the spreads would be small and not that much different across the funds but that's not what I saw on my brokers live pricing. VWRP and SSAC were pretty consistent at 0.03-0.04% and 0.05-0.07% respectively but IMID was anything from 0.04%-0.15% and FWRG was even worse at 0.21%-0.46%. I ignored ACWI and ACWL because their TERs are 0.4% and 0.45% respectively.
I get why FWRG is higher because it's only £50m but IMID is £830m in size? Perhaps FWRG will continue to grow (I think it's adding £10m a month or so) and the spread will come down in time but I don't want to be hit should I decide to switch in the near future.
Index wise, I prefer FTSE all-world over MSCI ACWI because of its greater coverage but I'm receptive to MSCI ACWI IMI. All in all I guess I'm plump for VWRP.
I hope it helps others in their decisions.

InvesterJones

Also depends on your investment time frame - bid-spread cost is divided by the number of years you hold (if comparing to TER) so you can work out if it's better to get low TER or low bid-spread.

masonic

As above, it is a one-off cost, and in practice can differ significantly from estimates. Things like the time of the day you trade and whether markets are rising or falling can have an impact. A one off 0.15% each way can disappear in the noise of daily price movements, and amortised into a 20 year holding period it isn't worth worrying about IMHO. Whereas 0.05% extra management fees per year over 20 years could have a more significant impact.

easysaver

I did wonder if the spread was higher in the morning before the North American markets were open but I guess my sampling was swamped by whatever was going on on a macro scale.
I see spreads as analogous to initial charges on funds - an entry/exit fee if you like.
Even if you intend to invest for 20 years it doesn't mean that your chosen fund will be the most appropriate throughout that time. Just look back 20 years of the investing landscape to see the scale of potential changes.

GeoffTF

easysaver said:

I'm trying to minimise costs which restricts me to ETFs because of my broker pricing otherwise I'd not hesitate to invest in HSBC FTSE All-World Index Fund C with its low 0.15% TER and no buy-sell spread.

Single pricing is not a free lunch. Both ETFs and OEICs have costs associated with trading. For ETFs, there is a bid/offer spread, and the fund can trade at a discount or premium to Net Asset Value (NAV). Those costs are reasonably transparent. Not so with OEICs. If the OEIC is priced at NAV, the cost of creating and redeeming units are borne by long term investors. That is not good. That problem is addressed by swing pricing, which makes the people buying and selling bear the costs. There is, however, no transparency there. Even Vanguard keeps these numbers close to its chest. You do not know whether the price when you traded was above or below the NAV. If there was a net creation of units, it will be above the NAV, and if there was a net redemption of units, it will be below the NAV.

masonic

easysaver said:

Even if you intend to invest for 20 years it doesn't mean that your chosen fund will be the most appropriate throughout that time. Just look back 20 years of the investing landscape to see the scale of potential changes.

This is an argument against frequently chopping and changing. When starting a new portfolio you have to choose something, so why not opt for the most appropriate choice at that time? If a better fund comes along, then annual savings must be weighed against one-off costs. I'm seeing little reason to prefer VWRP, when cheaper options have existed since before it launched.

When I started out, the best trackers available were the HSBC index funds with AMC ~1% pa. When Vanguard launched in the UK, it was a no brainer to switch, and ultimately my core portfolio has ended up in mostly iShares regional funds/ETFs at an average OCF of just under 0.1% (though my workplace pension is 100% HSBC FTSE All-World Index Fund). I've not got a single holding that has survived 20 years, but CSP1 has featured in my portfolio for around a decade. Where the market is today, there is very limited scope for charges to reduce much more.

masonic

GeoffTF said:

easysaver said:

I'm trying to minimise costs which restricts me to ETFs because of my broker pricing otherwise I'd not hesitate to invest in HSBC FTSE All-World Index Fund C with its low 0.15% TER and no buy-sell spread.

Single pricing is not a free lunch. Both ETFs and OEICs have costs associated with trading. For ETFs, there is a bid/offer spread, and the fund can trade at a discount or premium to Net Asset Value (NAV). Those costs are reasonably transparent. Not so with OEICs. If the OEIC is priced at NAV, the cost of creating and redeeming units are borne by long term investors. That is not good. That problem is addressed by swing pricing, which makes the people buying and selling bear the costs. There is, however, no transparency there. Even Vanguard keeps these numbers close to its chest. You do not know whether the price when you traded was above or below the NAV. If there was a net creation of units, it will be above the NAV, and if there was a net redemption of units, it will be below the NAV.

Yes, I remember the days when Vanguard had a dilution levy on its open ended funds, which retail investors seemed not to like, so now the cost is hidden and investors are blissfully ignorant.

shortseller09

You can always try placing an order in the middle of the spread which may be filled.

Malthusian

The trouble with Vanguard's dilution levy is that they applied a charge to cover the cost of buying shares on your behalf, even when they weren't actually buying any shares because inflows matched outflows. (I.e. your money was used to pay out investors going the other way and you got their already-bought-and-paid-for shares.)

By today's standards, "we'll transparently charge you for this thing we might not actually be doing" isn't transparency.

GeoffTF

Malthusian said:

The trouble with Vanguard's dilution levy is that they applied a charge to cover the cost of buying shares on your behalf, even when they weren't actually buying any shares because inflows matched outflows. (I.e. your money was used to pay out investors going the other way and you got their already-bought-and-paid-for shares.)

By today's standards, "we'll transparently charge you for this thing we might not actually be doing" isn't transparency.

Vanguard's dilution levies went into the fund and benefited the long term investors, including you once you had bought. They applied dilution levies to only a subset of their funds, notably bond funds. I had a holding of Vanguard Developed World ex UK in the early days, when the minimum investment was £100K per fund, and there was no online service or ISAs or SIPPs. There was no dilution levy on Vanguard Developed World ex UK. When I asked about that, I was told that the cost of creating and redeeming units came out of the Annual Management Charge. Their Terms And Conditions said that they would sell your investment if they believed that you were trading.

Vanguard still uses dilution levies in the US, and was reportedly very miffed that they had to drop them in Europe, because many of the platforms could only cope with single pricing, and they had difficulty in convincing people that the levy went into the fund and not their pocket.

masonic

Malthusian said:

The trouble with Vanguard's dilution levy is that they applied a charge to cover the cost of buying shares on your behalf, even when they weren't actually buying any shares because inflows matched outflows. (I.e. your money was used to pay out investors going the other way and you got their already-bought-and-paid-for shares.)

By today's standards, "we'll transparently charge you for this thing we might not actually be doing" isn't transparency.

I wasn't opposed to the dilution levy in principle. To be fair it should be scaled to a level that reflects the proportion of days there have been net inflows. Then it is just spreading the cost over all buyers, rather than just those who unluckily placed their buy order on a day when too few people were selling. Knowing what you'll pay in advance is more transparent than not knowing until the order is executed in the case of swing pricing and given the choice I'd take the option of a known dilution levy vs unknown swing price. But with ETFs and other exchange traded investments you can get an at-best quote or place a limit order, which sidesteps this issue.