Investors have never had it easier when building a diversified portfolio of global stocks. Market-cap-weighted Canadian, U.S. and international stock funds can each be obtained for less than a dozen basis points each.
But holding separate funds does require a small amount of work. Shares may need to be sold when allocations are rebalanced, which can introduce inefficiencies through trading costs and taxes. Therefore, a total world market fund can be a compelling alternative.
These strategies allocate broadly to stocks listed in every public market, across large, mid- and small caps. They require no intervention on the part of the investor, making them a simple and efficient way to gain access to the global stock market.
Vanguard Total World Stock ETF (VT), which trades on the New York Stock Exchange, is a solid one-stop choice for exposure to global stocks. It accurately represents the global investable universe and is well diversified across developed and emerging markets. It also has one of the lowest expense ratios among global equity funds and earns a Morningstar Analyst Rating of Silver.
This fund tracks the FTSE Global All-Cap Index, which covers almost all globally listed stocks across developed and emerging markets, representing the largest 98% of the investable market by market capitalization. The fund's inclusion of stocks of all sizes enhances diversification. A typical fund in this category holds less than 200 stocks, while this fund covers more than 7,500. The top 10 holdings represent only 8% of the portfolio.
Holdings are weighted by market capitalization, which helps mitigate turnover and the associated transaction costs. This weighting approach also emphasizes multinational firms that are large and profitable. Stocks from the United States make up about half of the portfolio and dominate the top positions. Companies such as Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN) and Johnson & Johnson (JNJ) are among this fund's largest holdings. International companies like Nestlé and Tencent also land in the top 20 holdings.
Sector allocations are similar to a typical fund in this category, but country and regional weightings are slightly different. This fund has fewer assets invested in Europe and makes up for this difference with higher allocations to stocks listed in North America and Asia.
These modest differences have not been significant enough to have an impact on the fund's performance. Total and risk-adjusted returns have landed near the category midpoint over the trailing three and five years through September 2017. That said, the fund's low management-expense ratio should give it a long-term durable advantage over most of its peers. Vanguard charges only 0.11% for this fund, making it one of the lowest-cost choices in the category.
Fundamental view
Market-cap-weighted, globally diversified funds such as this one take a truly passive approach to the global stock market. These types of funds provide investors with diversified access to the investment opportunity set that active managers select from and make no active bets on specific regions, countries, sectors or individual stocks. This type of approach essentially free-rides on the collective opinions of active investors. The weight of a given stock, country or region will therefore be an outcome of the collective opinions of these investors. As a result, this type of fund likely won't be a top performer among its peers over short periods. However, its low fee should give it a long-term edge compared with actively managed alternatives.
This global approach also eliminates the need to hold separate Canadian, U.S. and international stock funds. While the share of U.S. stocks tends to hover around 50%, it can and has diverged in the past. Prior to the 2007-09 financial crisis, U.S. stocks represented approximately 42% of the total global market. But the strong performance of U.S. stocks following the crisis has pushed their weight up to 53% as of September 2017.
Stocks from Japan and the United Kingdom are the second and third most heavily weighted countries after the U.S. and emerging markets collectively represent about 7% of this fund's assets. Financial and technology stocks are the largest sectors and account for 18% and 16% of this fund's holdings, respectively.
The fund does not hedge its currency exposure, and because it trades in U.S. dollars, Canadian investors are exposed to two levels of currency risk: fluctuations between the U.S. dollar and the local currencies of underlying stocks will affect the fund's U.S.-dollar unit value, and fluctuations between the greenback and the loonie will affect what those units are worth to Canadians.
Vanguard recently cut the MER on this fund to 0.11% from 0.14%. This is one of the lowest fees among global equity funds, both in the U.S. and in Canada. The fund builds on its cost advantage with low turnover, which translates into low transaction costs. The last reported turnover ratio landed in the bottom quintile of the category. The managers engage in securities lending, and the revenue from this activity partially offsets the fund's expenses.
