Picking a world tracking ETF

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/82063472#Comment_82063472

That is commendably honest. You believe that the US market will underperform. What I do not buy is the notion that under-weighting the US makes sense without the investor (correctly) believing that he knows knows more than the market.

It does not need a "US centric AI revolution" for the US to continue to outperform. It is the largest market by any measure, with laws that greatly favour capital over labour. A bigger threat than AI disappointment may be the election of a European style social democratic government.

I do not know what will happen, and neither does anyone else. So far, under-weighting the US has been very costly. Even if you are right in believing that will change, you will have to get the timing right to profit from it.

Eco_Miser

https://forums.moneysavingexpert.com/discussion/comment/82063441#Comment_82063441

Copying and pasting your earlier post (with small edits to the white space for neatness/ restoring to what was displayed)

" aroominyork Posts: 4,015 Forumite
8 July at 4:50PM

A global tracker makes sense if you are content to receive the average
performance for the equity portion of your portfolio with low costs.
Those who believe that they know more than the market will make other
choices.

I don't believe I know more than the market. I just don't want two-thirds of my equity exposure to be in one
country. Of course, if I could only invest in one country I would choose the US, but I don't have to make that choice.

"

You quoted "A global tracker …" from GeoffTF, and wrote "I don't believe I know more …" ?

If so the attribution is correct. The problem is that you failed to identify the quote as GeoffTF's, so when quoted again, it looks like yours, except it has a quote bar.

Notepad_Phil

The discussion of how much US to have in your portfolio was brought to mind whilst reading a trustnet article about Vanguard bringing out 4 new ETFs, part of which I've pasted below.

Vanguard has launched four new US exchange-traded funds (ETF) to give investors more choice when buying into the world’s largest market.

The Vanguard Russell 2000 U.S. Small-Cap UCITS ETF and Vanguard Russell U.S. Mid-Cap UCITS ETF will both cost investors 0.2% per year and offer access to companies further down the market capitalisation spectrum.

Meanwhile, Vanguard Russell 1000 U.S. Value UCITS ETF and Vanguard Russell 1000 U.S. Growth UCITS ETF will have an ongoing charges figure (OCF) of 0.16% and will invest using screens to allocate within specific investment styles.

So perhaps instead of under-weighting the US an investor could aim to instead target more of the mid and lower capitalised companies. I have to admit my concern with the US is more to do with the heavy concentration of the top companies, so you could target a general US index along with these new ETFs to get to something that you were happy with.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82063587#Comment_82063587

"That is commendably honest. You believe that the US market will underperform. What I do not buy is the notion that under-weighting the US makes sense without the investor (correctly) believing that he knows knows more than the market."

Market behaviour is an emergent property of its structural mechanics. It is its behaviours rather than its knowledge that concern me - it behaves like a Jekyll and Hyde character, alternating between periods of extreme greed and FOMO to those of extreme fear and pessimism, driven by underlying human psychology. A rational investor doesn't need to step into those shoes and ride along. They have their own objectives that they are seeking to meet, and those may not align with the market.

So under-weighting the US can make sense if you know your objectives and simply want something different than the market currently wants.

"It does not need a "US centric AI revolution" for the US to continue to outperform. It is the largest market by any measure, with laws that greatly favour capital over labour."

From this starting point, it actually does. The US market trades at a massive valuation premium relative to the rest of the world. To maintain that premium and continue to outperform, the US cannot just grow at historical norms, it requires an extraordinary, compounding, earnings growth gap over ROW. The AI narrative is the only thing currently justifying that required growth rate. Without it, contraction is a major headwind. That is a risk that can be mitigated while still meeting investment objectives. Whether or not that risk materialises, nobody can predict, but we insure against many other unpredictable risks.

"I do not know what will happen, and neither does anyone else. So far, under-weighting the US has been very costly. Even if you are right in believing that will change, you will have to get the timing right to profit from it."

Over my 20-year investing history for which I have good data (during which the US has always been capped at under 50% of my equities), my personal annualised XIRR is 10%. Over that 20-year period, the FTSE All-World index returned roughly 10% annualised. Capturing the full global market return while successfully insulating my portfolio from extreme single-country concentration has cost me very little. Timing implies I am waiting for a signal to jump back into the US. I am not. I am maintaining a permanent 1:1 US/ROW cap. That isn't timing the market, it is the exact discipline used to avoid trying to time it.

Ultimately, we are optimising for different things. You are looking at a market-cap index as an absolute benchmark to beat. I am looking at my portfolio as a risk-managed tool designed to fund my specific goals with maximum structural robustness.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82063844#Comment_82063844

Something to remember about the S&P indices is that they have a profitability filter, which the Russell indices do not. Smaller US companies have not enjoyed the same risk premium as seen on this side of the pond historically, but if you want to you can also access them via the S&P mid-cap 400 or S&P small-cap 600 indices. Perhaps smaller companies struggle more under the unconstrained capitalism Geoff hinted at upthread - I don't know. On that basis, the value fund might be the more attractive - although I'd suggest Vangaurd is a little late to the party with all these ETFs.

jifmoose

Market behaviour is an emergent property of its structural mechanics. It is its behaviours rather than its knowledge that concern me

I really like this way of putting it. Talk of the market "knowing" more, or less, sounds like a category mistake to me: it implies "knowledge" and hence (something like) justified true beliefs of the market itself. Outside circularity (we are justified in believing it was true that the market believed it … until it believed something else) it's a hard argument to make.

This doesn't mean that we can't understand the market as an aggregate expression of the beliefs of (knowledgeable?) participants at any given moment (or that we can't take in our knowledge of conditions etc from outside, or make arguments for long-term behaviour based on foundational structures etc). Naturally we would need to factor the psychological aspects Masonic mentions in as well. Which are stronger? Which cancel out in the long term? Does that cancellation get us closer to knowledge, or is it rather arbitrary? All these are empirical questions and so hostage to fortune.

Since none of those participants have a reliable way of modelling the future, the market's intrinsic behaviour can only provide a snapshot of conditions now, a guide to expectations, but not be a repository of knowledge in any real sense.

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/82063860#Comment_82063860

The market does exhibit periods of excessive optimism and periods of excessive pessimism. The timing of these periods is, however, unpredictable. Periods of optimism and pessimism do not make the market easier to beat. A passive investor in the global equity index does not need to step into anyone's shoes. They just have to do nothing. All rational investors share the objective: to maximise their risk adjusted return. Barring differences in local currencies and taxation, they should all hold the same equity portfolio. The only equity portfolio that they can all hold is the global equity index.

Under-weighting the US purely because it is a large percentage of the global market does not make sense. If the companies quoted in the US were to disperse their listings across the world, that would not reduce risk. Under-weighting the US because it has a higher valuation currently does not make much sense either. The differences in valuation are not massive:

United States 26.62
All World 22.41
Asia ex-Japan 19.64
Europe 17.97
Pacific 17.61
Latin America 11.36
Africa 10.90

https://worldperatio.com/area/

These differences can reasonably be reconciled with the different prospects of the various regions.

At age 76, my days of trying to beat the market are over. I need a simple portfolio that requires the minimum amount of intervention. There are no magic numbers that I have to target for risk and return. I aim for a level of risk that I feel is compatible with my duty for good stewardship.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82064039#Comment_82064039

We are talking at cross-purposes because we are operating on fundamentally different definitions of what constitutes a "rational" objective. Until we resolve that, we are just going to keep going around in circles.

You state as an absolute rule that: "All rational investors share the objective: to maximise their risk adjusted return".

Respectfully, they do not. That is an academic definition used by institutional fund managers who are judged against a benchmark. For an individual, maximising a theoretical mathematical ratio is secondary. The primary objective of a rational individual is liability matching: ensuring they have the correct amount of real purchasing power, in the correct currency, at the time they need it to fund their life.

This brings me to the persistent straw man that my allocation is an attempt to "beat the market". Let me be as explicit as possible: I am entirely indifferent to whether my equity portfolio beats the global index or trails it.

My 1:1 US/ROW structural cap is not a tactical bet designed to generate alpha, it is a permanent risk-management ceiling. I have looked at a global index that forces me to place 60%+ of my equity wealth into a single nation trading at a 48% P/E or 70% CAPE premium, and I have rationally decided that this exceeds my personal risk tolerance. I don't believe the US is a fundamentally different nation than it was in the early 2010s when those premiums were much smaller (or indeed the 2000s when they were virtually non-existent). I'm completely comfortable missing out on some potential future upside in exchange for a more structurally balanced portfolio.

If the US market continues to outperform and my portfolio trails the global index as a result, I will not view that as a failure, because my goal was to insulate myself from the tail risks had it gone the other way. I can harvest adequate returns from elsewhere while narrowing the fan of possible outcomes.

Based on what you've shared of your own perspective, it's clear you've arrived at a philosophy that suits your circumstances perfectly. Your final paragraph actually captures my point better than I did: you’ve structured your portfolio for simplicity, minimal intervention, and your personal view of stewardship at age 76. Those are your specific, rational objectives. My objectives are simply different, which is why our portfolios look different.

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/82064075#Comment_82064075

You wrote:

You state as an absolute rule that: "All rational investors share the objective: to maximise their risk adjusted return".

Respectfully,
they do not. That is an academic definition used by institutional fund
managers who are judged against a benchmark. For an individual,
maximising a theoretical mathematical ratio is secondary. The primary
objective of a rational individual is liability matching: ensuring they
have the correct amount of real purchasing power, in the correct
currency, at the time they need it to fund their life.

Academics assume that maximising the risk adjusted return is the objective of all investors. The investors can adjust their risk/return trade-off by holding cash or by using leverage. See the derivation of CAPM, for example. In my case, liability matching is trivial because I have far more money than I need to achieve that. My objective is to maximise the amount that I leave to charity on my death, which could be tomorrow or in twenty years time.

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/82064182#Comment_82064182

You can choose reduce the level of risk by holding a percentage cash or bonds. If you have enough money, you do not have to buy equities at all. If you do need to hold some equities, the higher the risk adjusted return, the greater your chance of being able to pay for care. We do not know what the risk adjusted return will actually be. We have to do our best to estimate that.

https://en.wikipedia.org/wiki/Modern_portfolio_theory