All World ETFs Offer Access to Global Growth Opportunities

We believe that the equity allocation, large or small, of portfolio should reflect the global pattern of business development, following global growth and profits fundamentals.

Investing with a home country bias may be emotionally comforting, but it is becoming increasingly suboptimal.

We have written repeatedly that the tendency to massively overweight home country positions with a toe or a foot in other parts of the world fails to participate fully in world growth and opportunity.

A total world fund such as Vanguard’s Total World Stock ETF (VT) based on the FTSE All-World Index is a good option to consider for those seeking simplicity in their portfolios, or as a core position to be supplemented by more specialized funds. Access fund webpage.

The Index includes approximately 2,900 stocks of companies located in 47 countries, including both developed and emerging markets. The fund holds 1,737 stocks and carries a 25 basis point expense ratio.

Another total world fund is Barclay’s MSCI ACWI Index ETF (ACWI) based on the MSCI All World Country index. It is also a core fund. Access fund webpage.

The index represents 48 developed and emerging market countries. The fund holds stocks of 701 companies and carries a 35 basis point expense ratio.

Caution: VT and AWCI do not yet have enough regular volume to be effectively utilized right now, but that situation will eventually improve.  In the meantime, they can be simulated.  For example, 42% VTI (Total US Stocks) and 52% VEU (Total World Stocks ex US) is equivalent to VT.

Note that both VT and ACWI are free-float market-cap weighted and currently have 41.8% and 41.3% US stock weightings respectively.  That tells you that 58+% of the world’s nominal stock investment opportunity is someplace other than the US.  Compare that to the basic mindset and traditional belief that a US investor should have 75% to 85% of equity asset in the home market.  Why? Intellectual and cultural inertia is our guess.

One possible argument against venturing heavily abroad is that large US companies have so much international involvement that in combination with moderate direct international exposure, US investors actually get the global exposure they need.  Well maybe that’s true.

Another argument is that for large-cap, multinational companies, global investing through country funds will become decreasingly effective at producing superior returns, while global sector investing will become increasingly more effective.  So, if a portfolio has US domiciled global leaders in the right sectors and industries, that’s what’s really important.  That may true too.

The important point is that those arguments against global weighting of the equity portion of a portfolio are actually arguments for global weighting — they just get there by different avenues.

For smaller companies that are less multi-national in character, global investing through country funds may continue to be most effective.

Performance Comparisons:

The chart below compares (VTI) (total US stocks) and (VEU) (total non-US stocks) to VT and ACWI.

[click image to enlarge]

Recently, the US market has been outperforming the non-US markets, which puts the total world funds behind the US.  That may continue for a while, but long-term the world is expected to grow more than the US, and participating in that growth will be a key determinant of portfolio gains.

Our bottom line is that whether you seek a global posture through world funds, region or country funds, or through global leaders in target sectors and industries, it is important that you assure yourself that your portfolio is positioned to participate strongly in global growth.

Disclosure: None

Comments

[donzelion:]

Seems to me that the tax complexity of investing abroad is likely to play a role in equity selection. A U.S. investor buying U.S. stocks can only be taxed a certain number of times (dividends + capital gains).

A U.S. investor buying foreign equities may be taxed more than this (dividends + capital gains + foreign taxes).

Granted, a U.S. investor could recover at least some of the foreign taxes by filing additional forms, but the additional complexity and the possibility that such a recovery will not make them whole raises the cost of foreign equities modestly. Add in currency risks and others, and suddenly you have a rational justification for some degree of home-country bias.

If all that is true, then the disparate treatment of foreign and U.S. equities for tax purposes would also weigh against the "all world" ETFs and in favor of separate asset location for US and foreign ETFs (of course, tax laws could change, but in this climate, it seems EXTREMELY unlikely that Congress will pass laws favoring investment in foreign equities).

Jan 08 05:14 AM