ETF List 2019 Part 2: World

Hi RIP friends,

Welcome to ETF List Part 2 on World / International stocks. Here you can find part 1 on US, where I also introduced the doc and explained the content.

TL;DR: I’m building a more detailed version of 2018’s ETF List, and it’s taking a lot of time because this time I want to be as professional as I can. I’m learning a lot of stuff in this process, and I’m enjoying it. Sadly, the time I can allocate to my blog is getting compressed by my daughter waking up earlier in the morning… and these posts are by far the most time consuming ever. Doing the research, gathering the numbers, discovering new funds, adding columns to the doc and so on. So please, be patient!

Here’s the doc embedded:

And here you can find it on Google Drive with commenting permission. Feel free to leave a comment if you have questions.

This second episode is on world / international stocks (from a US perspective), i.e. funds that own stocks from the entire world, or the entire world excluding US, or the developed world and so on.

Yes, I know it’s a vague category, but let’s put it this way:

• if you’re an american investor, part 1&2 (US + rest of the world) should be all you will ever need to know about stock ETFs.
• if you’re a uber-lazy investor and just want to own a single world fund, part 2 alone is all you’ll ever need to pick a stock ETF.
• if you want to own funds at macro-regional level (US, Europe, Pacific, Emerging…), you can skip part 2 completely.

So, with this part 2 we covered two out of three use cases so far. Not bad!

Doc-wide update: I added the “# of stocks” column. As the name suggests, it indicates the number of different stocks (companies) in the ETF. As you may imagine, a S&P500 fund owns more or less 500 stocks. I find the info to be useful: it gives me a rough idea of the differences between otherwise similar indices like MSCI World, MSCI ACWI, MSCI ACWI IMI.

“RIP, you should say indexes, not indices”

Both indexes and indices are valid plurals of index. I picked indices for no specific reason and I’m going to stick with it 🙂

Let’s dig into what I learned, found, discovered, personally picked, and recommend to you 🙂

Let’s start small, let’s start with the entire world.

What is “the world”?

What do you think a World ETF contain? Stocks from every country in the world, right? Probably each country’s weight in the index is proportional to the country market cap, and each stock is also market cap weighed in the index, right?

Yes!

Yes, each of the 23 countries are market cap weighed in the world index, and each company is market cap weighed in the country share.

“Wait… you missed a zero. Last time I checked, the world had an order of magnitude more countries, did I miss something?”

Nope! A World ETF owns stocks from only the developed countries, i.e. 23 countries according to MSCI.

“What the hell is MSCI?”

Glad you asked!

From their website:

We are an independent provider of research-driven insights and tools for institutional investors. For more than 40 years, MSCI‘s research-based indexes and analytics have helped the world‘s leading investors build and manage better portfolios. Clients rely on our offerings for deeper insights into the drivers of performance and risk in their portfolios, broad asset class coverage and innovative research.

MSCI is one of the independent organizations that, among other things, define market indices. Other independent organizations worth mentioning are Standard & Poor’s (S&P) and Financial Times Stock Exchange Group (FTSE Russell).

Vanguard ETFs are usually officially tracking FTSE indices, while iShares ETFs track MSCI indices. It’s not a law, but that’s what I found out while researching for this post.

Since I like the MSCI website more, I’ll be referring to MSCI indices in this quick intro to countries classification.

According to MSCI, countries are currently classified in Developed, Emerging, and Frontier:

So yeah, by default “The World” means the 23 developed countries.

In the Emerging Markets we find another bucket of 24 countries.

Indices are living things. In 2018 Saudi Arabia was added to the EM list, and in June 2019 Argentina will move from Frontier to EM too. There’s also a proposal to move Kuwait into EM being discussed these days.

Anyway, Developed and Emerging together forms the “All Country World Index“, also known as ACWI in MSCI terminology.

Since ACWI is market cap based, and since Developed has more than 10x the market cap of the Emerging, the performance difference between the two indices is minimal.

Take a look:

We know that thanks to the global economy the markets are becoming more and more interconnected – and performances more and more correlated – but Emerging Markets (green line above) can still be a diversification tool. High volatility, high risks, very speculative. But when diluted with the MSCI World (developed countries, yellow line above) into the ACWI index (blue line above), with their small impact, they have almost zero effect.

Investing in MSCI World or MSCI ACWI is almost exactly the same thing.

I’m not saying investing in EM doesn’t make sense. I’m saying that if you “market cap” the world, Developed countries cover more than 90% of the markets. If you want to bet on EM, you should allocate more than their current weight in the ACWI index.

Then there are the Frontier Markets. According to Investopedia:

Frontier markets are countries that are more established than the least developed countries (LDCs) but still less established than the emerging markets.

Frontier markets are also known as “pre-emerging markets“.

We’ll look into Emerging and Frontier Markets in another episode. Here we’re interested in indices and actual ETFs that include at least the developed countries (eventually excluding US).

The index that encompasses Developed, Emerging and Frontier is called MSCI ACWI and Frontier Market Index.

Given the minuscule market cap of Frontier markets, the impact of Frontier on the index is negligible:

It’s fun how they defined “the world” (23 countries), then “no wait, the REAL world” (+24 countries), then “wait wait (Ku)wait! Here is the really real world!” (+ another 20-35 countries).

How do they call the set of the ~250 actual countries in the world?

Even funnier: Vanguard total stock market Index is US only.

Btw, we’ll talk about Frontier investing in the EM episode.

We won’t consider “MSCI ACWI & Frontier index” here, mainly because I couldn’t find any ETF tracking the index. Which is reasonable though: market cap of Frontier is minimal and costs to access Frontier stocks is very high (reflected in high TER of Frontier ETFs).

About market cap by country classification:

According to Investopedia:

In January 2018, frontier-market stocks had a combined market capitalization of over $700 billion.

So, essentially, the entire Frontier Market is worth less than Microsoft. It would be 5th in the S&P500 if the entire Frontier Market were single company.

From Seeking Alpha, quoting a FTSE study:

According to FTSE, the market cap of securities in developed markets represents 90.9% of the total world market cap, while emerging markets represent 8.8%. Frontier markets comprise a mere 0.3% of the world’s total market cap.

91% of the market caps of publicly traded companies come from Developed countries. 9% from Emerging and a mere 0.3% from Frontier.

If you’re curious about market caps by country, here‘s a list I’ve found on Knoema.

Indices & Market Capitalization

How much of the market capitalization is represented by an index?

Let’s take for example MSCI World. Does it own stocks of every company in the developed world?

Well, it depends.

The MSCI world index itself is defined as:

a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country and MSCI World Index does not offer exposure to emerging markets.

“But RIP, I’m not ok with just 85% of the market cap.. I want to invest in small cap companies too 🙁”

You can, my friend. Either tracking indices that cover 100% (actually 99%) of the Investable Market (IMI) for that region, or investing in ETFs that track small cap indices directly for the same region.

So there’s MSCI World IMI, MSCI ACWI IMI and so on.

The first strategy (accepting market cap weights) produces negligible results. At least I expect that, since I didn’t find a simple graph comparing MSCI World and MSCI World IMI. On MSCI website I could only find World IMI vs ACWI IMI. But I have performance numbers in my ETF List and yes, it seems there are not many differences between ETFs and their IMI version (ACWX vs IXUS, and EFA vs IEFA). Surprisingly, IMI ETFs have lower TER. I would have expected the opposite, given higher number of stocks to handle, more trades, more dividends to collect and so on.

IMI ETFs usually track many more stocks for almost no difference. But as I said for ACWI vs World, it makes sense to invest in World Small Cap stocks directly, if you want an exposure greater/smaller than market cap weight.

That’s why second strategy makes more sense if you want to be a smart beta investor (don’t try).

There are indices tracking World Small Cap stocks.

I didn’t dig much into it, but I reported a pretty popular one: VSS by Vanguard.

But we’re already stepping into suggested securities, I see… ok, no more bullshit, it’s time to pick ETFs!

Before that, a quick recap:

Index	# of countries	# of stocks	% of total market
World	23	1632	77.27%
World IMI	23	5976	89.99%
ACWI	47	2757	84.75%
ACWI IMI	47	8686	98.70%
ACWI & Frontier	76	2871	85.00%
ACWI & Frontier IMI	76	8980	99.00%

Strategy and ETF Picks

Ok, time to talk about ETFs quality and personal picks!

There are so many aspects to consider, let’s start with the most important one: laziness!

Lazy or not?

Ask yourself this fundamental question: “how lazy are you?”

I classify investment laziness into categories, that absolutely don’t correlate with expected outcome. It might actually be the opposite: do you remember the dead investor‘s performance?

Anyway, for the ultra lazy folks, level 0 laziness strategy is: just pick a world ETF and invest all your stock-allocated money there. Developed or ACWI doesn’t matter much. IMI or not doesn’t matter much either.

This is an awesome strategy for everyone, actually. You get diversification, low TER, high trading volume (low bid/ask spread) all with a single fund. No need to buy S&P500 funds, small cap, and so on.

The agreement is that you’re ok with following the global market and its market cap weighted allocation. Right now “the world” is 50+% US, 85+% Large&Mid cap, 91% Developed countries… and if market footprint of countries change, your portfolio will reflect the new distribution of power.

If you’re ok with that – why shouldn’t you? Wanna be smart? Wanna time the market? Wanna bet? Wanna gamble? – a single “World ETF” is your strategy, and you can stop reading right now.

Well, wait a minute! Let me at least offer you my best pick 🙂

My pick for ultra-lazy investors is of course Vanguard VT.

With 0.10% TER you get exposure to 8000+ stocks. Vanguard funds usually track FTSE Index, not MSCI. VT tracks “FTSE Global All Cap“, which is similar to MSCI ACWI IMI.

Anyway, there are alternatives to VT but they don’t seem to be as good as VT.

iShares alternatives are laughable. The best ETF World (US domiciled) I could find from iShares is URTH, with 0.20% TER and less than 600M net assets. A dwarf compared to VT. There’s also the ACWI ETF, which is better sized (~10B) but 0.32% TER triggers a “no way!” answer.

The good news is that iShares offers a UCITS compliant World ETF named IWDA (a.k.a. SWDA), which is accumulating, IE domiciled (you lose 15% dividend withholding tax on the US portion, i.e. 55% of the fund), and nicely sized (12.8B). Beware its evil brother IDWR (a.k.a. IWRD, IQQW), which is the same fund except it’s distributing dividends, that comes with an evil 0.50% TER.

About UCITS compliance and Ireland domiciled ETFs, Vanguard’s alternative is VWRD (a.k.a. VWRL) which I consider inferior to IWDA (smaller size, higher TER and worse performances).

To recap:

• if you care about reducing costs (TER, trade fees, buy/sell spread) and getting back fraction of the dividend withholding tax, go with VT.
• if you care about UCITS (being able to invest from Europe) and US Estate Tax risks, go with IWDA.

So, if you were going to ask me “hey RIP, isn’t it enough to just buy VT and be ultra lazy?“, my answer would be “YES, it’s more than enough!”

“but hey, performances during last 5 years have been inferior to S&P500! I would have performed better just investing in S&P500!”

That’s because US outperformed the rest of the world during last 5 years. That’s not guaranteed in the future. Will the US continue to dominate? Who knows…

US or not?

… but ok, if you’re still reading it means you want to be more active, a “smart beta” investor! Good! I mean… not good! But let’s go on anyway.

Let’s say you’re a classical US investor who wants to invest in US stocks plus “International stocks”, like if the entire world except US is just “international”.

I classify this behavior as Regular Lazy, level 1 laziness: US & non-US, a two funds portfolio (for the stock component of your asset allocation).

Btw, if your desired US stock allocation today is 50-55%, i.e. current US market cap share of the world, maybe your Lazy-1 strategy is an overkill. Just go Lazy-0!

Ok ok, got it. Let’s move on.

So you want to invest in US on your own and buy international stocks. You already read my Part 1 post on US stocks and picked a US ETF like VTI, SPY, CSSPX or VOO. Good.

What are the options for “world without US” (that sounds like a dystopian movie title)?

Vanguard offers a trio of awesome US Domiciled ETFs, with low TER and high volume: VEA, VEU, and VXUS. The differences between the funds is in the underlying “world”:

• VEA tracks Developed countries all caps, like MSCI World IMI excluding US.
• VEU tracks all world, like MSCI ACWI excluding US.
• VXUS tracks all world, all caps, like MSCI ACWI IMI excluding US. Essentially VXUS is VT minus US stocks.

All of them are very good funds, performance differences and dividend yields are very similar.

iShares offers slightly inferior alternatives, not that bad on the IMI side: IXUS for ACWI IMI excluding US, and IEFA for developed IMI excluding US. The non IMI options (ACWX for ACWI excluding US and EFA for developed excluding US) have unmotivated high TERs.

Actually IEFA (which is the IMI version of EFA) is not tracking “world excluding US”, but the MSCI EAFE index. EAFE stays for “Europe, Australasia and the Far East”. Which is essentially the MSCI world excluding US. It’s composed by 21 developed countries instead of 22… no, wait, developed countries according to MSCI are 23. Who’s missing?

Holy shit I just realized I forgot CANADA!

So far I’m not investing in Canada! I personally own ETFs tracking US, Europe, Pacific, Emerging… Essentially I’m replicating an ACWI index except I don’t own any Canadian stock!

So EAFE is “developed world excluding North America”.

If you want to compose your World-Equivalent portfolio, mind that you would have to buy Canadian stocks! I found some “North America ETF”, like VDNR from Vanguard (Ireland Domiciled) that would work as replacement for US ones, but I’m not sure it matters much 🙂

For Americans: before investing in international stocks please read this very good Vanguard doc about it.

For Europeans: being US domiciled, for ETFs that track “excluding US” indices, is just a liability: you don’t get back dividend withholds issued by all the other countries. I’m not sure about it, but maybe US will also withhold an extra 15% (that you can claim back with a DA-1) that you would not have paid in the first place if you invested in IE domiciled funds (no withholding tax in Ireland). Anyway, take a look at this article on MustachianPost forum. User wapiti claims that “If a US ETF buys a UK stock and receives dividends. The ETF provider will beneficiate from the treaty concluded between the US and the UK. In the end, you will indirectly beneficiate from this treaty“. Interesting, I don’t have more data on this. If you want to better understand the three levels of tax withholding, take a look at this page on bogleheads wiki.

More on World ETFs by Vanguard and iShares on seekingalpha.

Yield or not?

The Yield Illusion posts on Big ERN blog (SWR series post 29, 30 and 31) threw some water over my willingness to jump over the dividend and dividend growth investing strategy.

So the question is: is it worth to try to be smart beta by adding some high yield stocks into your portfolio?

According to many practitioners it definitely is, according to few experts (Big ERN among them) it is not – it’s actually worse. Well, to be fair in post 31 ERN showed that on fixed income (bonds) pursuing high yield makes your retirement strategy worse in bear markets, while the equity component seems to be mostly ineffective (but not worsened by high yield).

My personal opinion – as I said in the previous post in this series – is that I know it’s an inefficient bet in Switzerland (dividends are taxed while capital gains are not) but I want to make it. My bet is that high yield stocks are undervalued and they’ll comeback in the near future. Value investing is not dead! Yes, I know, value investing is not dividend investing…

I know, I’m trying to be smarter than the dead investor. But at least I’m aware of it 🙂

My pick for High Dividend Yield world excluding US is VYMI. I purchased a bit of it in February, from the ashes of VHYD.

VYMI is the “international” version of VYM, which I also purchased last month from the ashes of VHYD.

I found another pair of ETFs US & International on dividend stocks: VIG and VIGI. I was surprised to discover that VIGI yield is a mere 2%, similar to S&P500. VIGI is tracking “Nasdaq International Dividend Achievers Select Index”, which according to official factsheet “is comprised of a select group of international securities with at least seven consecutive years of increasing annual regular dividend payments“. It’s more about dividend quality than pure yield. Interesting.

A nice article about VIG/VIGI and VYM/VYMI can be found on investopedia.

Small Cap or not?

Again, to try to “beat the market” with smart beta techniques (i.e. not stock picking and daily trading, but actively mix passive investing and active long term bets), maybe you want to add some worldwide small cap stocks to your portfolio.

I’m not personally doing this so far, but I might add some small cap in the future.

The only ETF I added to the list on world small cap stocks is the Vanguard VSS that tracks small cap stocks in the ACWI region (developed & emerging) excluding US. Performances have been meh (like any other “world excluding US” fund) and dividend yield (thus taxes) has been incredibly high for small caps, close to 3%!

RIP 2.0

I’m glad I took the time to start this doc. I’m doing a lot of research and I’m broadening my knowledge on passive investing by orders of magnitude.

But my actions (investments) still reflect a naive, childish approach.

RIP 1.0 used to own IE domiciled funds and invest irrationally. Someone copied my portfolio and got blasted on MustachianPost forum.

RIP 2.0 is trying to be more informed, more rational, but still probably inefficient: inferior bonds, high yield addicted, too much exposed to stocks compared with how I react when the market is down, too much manually diversified, too much exposed to small caps… but at least more informed and optimized here and there. It’s like first step toward FI in Your Money or Your Life, i.e. financial intelligence: you still suck, but at least you are aware of it. I’m in my financial intelligence stage with regard to investing 🙂

RIP 3.0 will achieve financial integrity, i.e. align my investments to my values: simplicity (less ETFs), risk aversion (less stocks exposure), not trying to act smart beta, and so on.

RIP 4.0 would be financially/mentally/invest-mentally free: don’t even think about investments at all. Just cashing out dividends quarterly, and checking balance once per month. Still far away.

This series is my celebration of RIP 2.0 mindset, and maybe first step toward RIP 3.0.

That’s all for part 2!