The only equity allocation you really need is a global tracker fund, as ex-hedge fund manager Lars Kroijer has previously explained on Monevator.
It sounds almost too simple. But how do you choose the best global tracker fund from all the options?
This updated guide will shed some light.
The idea is to invest in a total world equity index fund or Exchange Traded Fund (ETF) that represents the global investable market as far as is practicable.
This strategy is the ultimate expression of the wisdom of the crowd.
Or, as Lars puts it:
Since the millions of investors who make up the global markets have already moved capital between various international markets efficiently, the international equity portfolio is the best one for anyone without edge.
But notice that word we used above: practicable.
It’s a small world after all
You can tie yourself in knots fretting that an equity index is not exactly the same as the global investable market. That they lop out countries, private investment, property, and so on.
Plus most global trackers sample their indexes, as opposed to cloning them down to the last small cap firm.
All true. But a global equity index tracker is still the cheapest, most diversified, most efficient proxy of the real thing we’ve got.
If you want something better, you could end up wasting your days trying to simulate planet Earth like the mice in The Hitchhiker’s Guide To The Galaxy.
Don’t bother, because whatever you substitute is probably going to fall short or get blown up by the Vogons anyway.
Global tracker funds – what really matters?
All-World – Most products labelled world trackers only encompass developed world countries. They skip the emerging markets, including the likes of China and India.
Such ‘world trackers’ are less representative of the global economy. Instead look for ‘All-World’ or ‘Global’ index funds that include emerging markets.
Alternatively, if you do choose a developed world solution, you can add an emerging market tracker to your portfolio to make up the difference.
Diversification – Following on from the above, check how many equities a candidate includes. The more the better, because your tracker will then do a better job of fulfilling the total world part of the brief.
Cost – This is one factor that will definitely impact your returns. It is also knowable in advance. In a market where there’s little real difference between products, pick the cheapest.
Reassuringly expensive price tags will not secure you a superior global equity fund. Go for cheap, plain vanilla flavour trackers. Don’t worry about bells and whistles.
Don’t sweat small changes in cost, either. An Ongoing Charge Figure (OCF) differential of 0.1% on £10,000 is just £10. That would cost you £50 a year on a £50,000 investment if, for example, your fund’s OCF is 0.25% instead of 0.15%.
Only you know your personal hassle threshold. Try to work out whether the impact of costs over your investing lifetime is worth switching.
Take a look at tracking difference, too, as part of cost.
ETFs vs index funds – If you’re investing only a few hundred pounds a month then plump for an index fund rather than an ETF. This way you can choose a broker that offers commission-free investment and so avoid a surprisingly damaging cost. This is especially important if you invest monthly.
Investor compensation – You’re covered for up to £85,000 if your tracker is based in the UK. But if it’s based in Ireland – as most ETFs are – then you’re looking at €20,000 max. Note, investor compensation schemes only kick in if your broker or fund manager goes bust and your money disappears. Stock market losses are not covered!
The index – You should Google the tracker’s index to make sure it’s truly global. If it isn’t, find out what’s missing. Check your product’s factsheet, too.
To quickly see the difference between trackers use this fund comparison tool. (Sign up required). It enables the diligent to drill down into holdings, countries, market caps, sectors, and performance.
Note there are often small discrepancies between the information supplied by financial data firms and what’s published by the fund managers. This is nothing to get too hung up about.
Best global tracker funds – compared
|Tracker||Cost = OCF (%)||Index||Emerging Markets (%)||No of holdings||Domicile|
|HSBC FTSE All-World Index Fund C||0.13||FTSE All-World||10||3,100||UK|
|iShares MSCI ACWI ETF||0.2||MSCI All Country World||5||1,598||Ireland|
|Vanguard FTSE All-World ETF||0.22||FTSE All-World||11||3,461||Ireland|
|Vanguard FTSE Global All Cap Index Fund||0.23||FTSE Global All Cap Index||11||6,858||UK|
There is very little to choose between these four global equity trackers:
- HSBC’s fund is the cheapest and so tops the table.
- iShares features less exposure to Emerging Markets. That may or may not work out over the next decade. Nobody knows.
- Vanguard’s Global All Cap fund has about 5% small cap exposure and greater diversification than the rest.
The reality is these shades of grey have made little difference to results over the last few years. More on that in a moment.
I’ll also throw two other choices into the mix because they do something a little different:
- Vanguard LifeStrategy 100 fund – OCF 0.22%
- Fidelity Allocator World Fund W – OCF 0.25%
Vanguard’s LifeStrategy funds include a UK equity bias of around 20%. That compares to less than 5% for the true global index trackers in the table. You could choose LifeStrategy 100 if home bias suits your situation. Go for LifeStrategy 20-80 if you want an all-in-one fund that includes government bonds.
The Fidelity fund is actively managed. It features a REIT exposure of around 9% and a small cap allocation of about 10%.
Both are funds-of-funds. They manage their asset allocation by holding other index trackers instead of trading the shares of listed firms.
Here’s a useful piece on how to compare index trackers.
Best global tracker funds – results check
It’s a photo-finish between our best global equity trackers over three and five-year periods. Three years is the minimum reasonable timeframe for comparison. Longer is always better.
The two funds that trail the pack are our wild cards. Their tilts away from the global market didn’t help their cause over the last five years.
The three to five-year annualised returns above1 show there’s no need to sweat the differences between me-too global tracker funds.
The Vanguard FTSE All-World ETF has established a 0.1% annualised lead over the past five years. But that doesn’t prove it’s a better product. It’s just noise. It may flip over the next five years.
Many happy returns
We’re not checking performance to see which global tracker is best. We just need to make sure nothing on our list is broken or does something weird.
These funds are cookie-cutter products. The results demonstrate the top four all work just fine. They are practically interchangeable.
By all means spend time optimising if it helps you sleep.
But you’ll be doing little to sway the odds in your favour by researching the differences between, say, the MSCI and the FTSE variants of the global index. Or agonizing over a few percentage points of variation in any given sub-asset class .
If you truly believe you know what difference having an extra 1.55% in South Korea or 0.02% in Greece will make to your returns in a decade, knock yourself out.
But then you should run a hedge fund, not a DIY passive investing portfolio.
A world of difference
Here’s a few other things to note.
Fund sizes – All four trackers in the table have hundreds of millions in assets under management (AUM). Efficiencies of scale typically kick in above £100 million. But the Vanguard FTSE All World is four times bigger than the iShares ETF, and it didn’t make much difference over time.
Fixed income – The trackers in our table are equity funds. Owning additional high-quality government bonds is crucial to help you not to freak out during a stock market crash.
Income versus accumulation – All of our best global index tracker picks come in both flavours.
World and World ex-UK – I excluded these trackers, because it makes no sense to only include the Developed World or skip the UK when you’re trying to mimic the whole world.
The beauty of the single equity-tracker strategy is its simplicity.
Yes, you could shave away a little cost by building a similar portfolio from separate regional trackers.
But is it worth the aggro in time and dealing fees?
Can you trust yourself to stay in line with whatever the global market dictates? Or will you justify trimming back on Japan or the US or wherever because you can apparently spot a bubble that everyone else has missed?
Fill your boots if you need the control, but know that you don’t have to.
Nobody can predict which strategy will win over your investment lifetime. But putting a global tracker fund at the core of your asset allocation is a rational choice in an insane world.
Take it steady,
- Courtesy of Trustnet’s multi-charting tool.