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Vanguard filed for an All-World ETF, iShares already has one (ACWI) and Northern Trust (NTRS) has one in the hopper. The underlying indexes have U.S., developed foreign and emerging foreign.

This is probably the purest index exposure one could have. Like any other index fund, of course this type of product will have flaws, and by blending together everything a lot of the attributes from the components will be blended away. Be that as it may, it is still indexing at its purest--IMO anyway.

One thing to note is that foreign led domestic in the '70s, '80s and this decade, and domestic led in the '90s. If I had to make a bet on either the U.S. or the rest of the field I would take the field, but there will be periods that U.S. outperforms, and so an All-World product will obviously lag which is important to remember.

This brings up the idea of how lazy can a portfolio be and still add a little value. If I really wanted to buy the world and just keep it forever (assumes proper asset allocation) I think I would add in some sort of absolute return fund to smooth out the ride. In this little exercise I am assuming the bigger chunk goes into the all-world and a small portion to absolute.

The goal would be to smooth out the bear markets a little, and if you can average 8% from the all-world and 5% from the absolute and you save properly (which is always the most important), you can probably do ok.

This is obviously not my preference, nor would it be my 5th choice, but it makes for an interesting discussion....what say you?

More: Core Building Blocks: Large, Mid & Small Cap US ETFs, and Broad International ETFs

Comments

[phdinsuntan...:]

too much subprime markets exposure by now, maybe after the reality chek...

2008 Apr 04 04:33 PM

[ETF Imperator:]

I wonder what the merits are of the new Vanguard all world index versus VTI+VEU. The all world index could be good if commissions are an issue. Extra commissions from buying both VTI and VEU or the (presently) cheaper expense ratio of VTI+VEU.

Another thing is that allegedly the new Vanguard ETF won't have any small cap so it may be necessary to buy more shares of small cap ETFs to balance the all large and mid cap all world ETF. No global small cap yet so that leaves DGS, GWX, VBR/VB and some others until then. Although one could argue that this will add to commissions, I would normally have some small cap funds regardless of whether I chose the all world or VTI+VEU.

I already have VTI+VEU so I must see whether it makes sense to stop adding to those and switch to buying the all world.

2008 Apr 04 06:23 PM

[Indexor:]

Do you ever wake up at night and wonder if all the same ETFs coming to market by competing issuers isn't just a game of musical chairs being played on the deck of the Titanic?

2008 Apr 05 02:09 PM

[buyitcheap:]

This only works if there's some level of rebalancing. I would want to have more small/micro exposure and not tilted heavily toward the global megacaps.

2008 Apr 05 02:43 PM

[David Jackson:]

Roger, can you explain more your thinking on smoothing returns with some sort of absolute return instrument, as opposed to rebalancing?

2008 Apr 06 03:02 AM

[Roger Nusbaum:]

David, two ways to possibly address your question.

One is how lazy does one want to be? also how often would someone rebalance? I'm not sure it is economical for people to rebalance based on a 5% move, for example. There is some number for each person where it does makes sense. With $50,000 total 5% is probably no, with $5 million it would be economical.

Despite that it might not be economical people do feel, emotionally a 5-10% decline so the right absolute fund could help.

Another thing about rebalancing is that people seem to become reluctant to buy more stock when the market drops, just normal human nature.

It is possible an absolute fund could lessen the blow for people who are not good at rebalancing.

Lastly, its just a theoretical example:-)

2008 Apr 07 01:32 PM

[David Jackson:]

Roger, what I love about your articles is how they reflect a real understanding of how investors behave in the real world, as opposed to in theory or ideally.

When I wrote the ETF Investment Guide ( seekingalpha.com/artic... ) my goal was to prove to investors that they could do it themselves. But I received a ton of feedback from investors saying "I still need help, even wtih a portfolio of only a few ETFs".

That seems to be what you're saying in this comment -- that even managing a simple ETF portfolio and rebalancing it is too much for many people, and they might want to look at other options to reduce volatility.


On Apr 07 01:32 PM RogerNusbaum wrote:

> David, two ways to possibly address your question.
>
> One is how lazy does one want to be? also how often would someone
> rebalance? I'm not sure it is economical for people to rebalance
> based on a 5% move, for example. There is some number for each person
> where it does makes sense. With $50,000 total 5% is probably no,
> with $5 million it would be economical.
>
> Despite that it might not be economical people do feel, emotionally
> a 5-10% decline so the right absolute fund could help.
>
> Another thing about rebalancing is that people seem to become reluctant
> to buy more stock when the market drops, just normal human nature.
>
>
> It is possible an absolute fund could lessen the blow for people
> who are not good at rebalancing.
>
> Lastly, its just a theoretical example:-)

2008 Apr 09 07:49 AM