“The function of economic forecasting is to make astrology look respectable.” John Kenneth Galbraith
If you happen to be an index fund investor like me, you are likely to invest in an equity ETFs that tracks a broad market index.
Besides the well-known S&P 500 index ( VUSD/VUSA) , you are left with two popular indexes to buy- FTSE and MSCI world indexes. There are two ETFs listed in the London stock market that track these indexes. I talked about the reasons why I buy more VWRD instead of VUSD in this post.
It makes sense to invest in ETFs domiciled in Ireland due to tax implication, that is the reason why I only invest in ETFs listed in the London stock market but domiciled in Ireland because I am not happy to pay Uncle Sam 30% withholding tax on my quarterly dividend.
Let us look at these two popular ETFs,
The iShares Core MSCI World UCITS ETF – Ticker –IWDA
IWDA is listed on the London Stock Exchange. IWDA tracks MSCI World Index and has 1519 equity holdings. It is an accumulating fund and denominated in USD. The expense ratio is 0.20%.
You can opt for other equivalent ETFs such SWDA which is denominated in GBP and listed in the same market.
The Vanguard FTSE All-World UCITS ETF – Ticker VWRA
VWRA is listed on the London Stock Exchange as well. VWRA tracks FTSE All-World Index and has 3,740 equity holdings. It is an accumulating fund and denominated in USD . The total expense ratio is 0.22%.
You can choose for other equivalent ETFs such VWRD which is a distributing ETFs denominated in USD or VWRL which is denominated in GBP.
Both IWDA and VWRA are UCITS funds, domiciled in Ireland so basically they are more tax-efficient in terms of dividend withholding taxes and for retail investors, you have less estate duty/inheritance tax issues.
FTSE All World vs MSCI World
Since both are world index funds, what are the differences between these two ETFs? I was having the same headache which one to choose when I started my index fund investing journey a few years ago.
Major differences between these two Indexes are as below.
Countries Covered
MSCI World Index captures the large and mid cap representation across 23 developed Markets (DM) countries. DM countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Isreal, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.
Whereas FTSE world index covers developed and emerging markets. The countries include Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Czech Rep, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Kuwait, Malaysia, Mexico, Netherlands, New Zealand, Norway, Pakistan, Peru, Philippines, Poland, Portugal, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, UAE, UK, USA.
Therefore it is no surprise IWDA holds only 1519 equities ( it only captures developed markets) whereas VWRA holds more than 3700 equities ( more countries involved since it captures emerging markets too.)
You have to decide whether you want to buy into the opportunity of emerging markets. For me, no one can predict the future. No nation is this world can dominate forever if we look back at history. A super and rich nation at this moment and this century might not be a powerful nation after 100 years.
Therefore, owning 3700 companies is certainly a wiser choice than just buying 1500 companies.
How’s the performance?
MSCI World index data is easily available but not for FTSE All-World Index. However, if you look up at MSCI website, the MSCI All Country World Index (ACWI) should match up very well to the FTSE All-World Index. The MSCI All Country World Index seeks to capture the representation of 23 developed markets and 26 emerging markets.
If you look at the return from 2007 till 2020, emerging markets outperformed developed markets for the first half but underperformed the second half.
ACWI ( All country world index) seems to be performing quite closely as the MSCI world index.
But if you look back for a longer period from 1987 till Oct 2021, the annualized return for emerging market is 10.62% as compared to 8.69% for MSCI World index. And if you compare the return of MSCI World and ACWI since 1987, the difference is only 0.12%.
What is the risk?
OK, now we look at the risk of investing in emerging markets and developed markets.
As you can see from the table below, the standard deviation of MSCI emerging markets is 16.47% as compared to MSCI World and MSCI ACWI of 13.18%. Therefore if you invest in MSCI ACWI ( and hopefully FTSE World index), your risk is lower than investing in emerging markets alone.
Why do I choose FTSE ( VWRA) instead of MSCI World ( IWDA)?
I put high hope on emerging markets especially Indonesia, India, China and South Africa and I will say it again, no one can predict the future. By buying VWRA, I tap into the opportunity of companies in these countries turning into titans in future.
If you ask any investor, the consensus will be you are better off by investing in 3700 companies than 1500 companies. I don’t mind to pay the extra 0.02% of expense ratio imposed by VWRA/VWRD by owning extra 22 00 companies.
The purpose of diversification is not only to diversify away from the risk. It is also to capture the possible returns. And remember, don’t put all your eggs in one basket!
Conclusion
It is pointless to talk about investment if you don’t get started today. You have to remember, investment is meant for long term. You will never see the beauty of compound interest after 1-2 years, but it works wonder if you stay invested for more than 10 years, 30 years or even 100 years.
A third world country today might turn into a super nation 30 years down the road, who would have expected China today 30 years ago.
Diversify your investment by buying all possible good companies around the world and just wait patiently. Don’t listen to stories people making fast and huge returns overnight, it is exception rather than norm!
Personally, I use Interactive Brokers (IBKR) to buy and hold VWRD.
Interactive Brokers is one of the most cost-effective platforms to invest in these UCITS ETF.
Open your IBKR account today.
Learn how to start your ETFs investing journey by reading my investment book.
Will the new proposed tax law to tax foreign sourced income change your strategy to buy distributing fund rather than accumulating fund?
Dear Daniel,
No, the new tax law will mot change my strategy of opting for distributing ETFs. I keep my money overseas and will not bring back the money until retirement.
IMID (SPDR MSCI ACWI IMI UCITS ETF) is also a good choice now, with total expense ratio of 0.17%.
YES, IT IS BUT I PREFER VANGUARD ANYWAY.