The MSCI World is one of the most popular indexes for European investors. That popularity is reflected in the number of MSCI World UCITS ETFs available: 13. It can get confusing to choose among similar alternatives with minor differences. So, how do you determine which MSCI World UCITS ETF is best for you?
My advice for making decisions like this one is to decide on a criteria first. In my opinion the most important criteria for choosing the best MSCI World ETF is (in this order): availability, use of dividends, TER, fund size, replication type, fund provider.
Which MSCI World UCITS ETFs do you have access to? The ETFs you have available are your starting point. Do you have access to all 13 listed in justETF?
Does your broker only give you access to a more limited set of ETFs? If you can only invest in a limited set of discounted or commission free ETFs from your broker than you have a different starting point.
This article assumes you are trying to decide among 13 ETFs. Its principles also apply if you have a different starting point.
Use of dividends
A fund may either distribute the dividends to investors or reinvest the dividends within the fund. You need to figure out which one is most appropriate for your particular case (this varies by country/tax situation). There are 8 accumulating MSCI World UCITS ETFs and 5 distributing MSCI World UCITS ETFs. This criteria cuts the choices by almost half.
Lower costs lead to higher investment returns. This is one of the few things you control in investing and you should pay special attention to it. If you sort the available ETFs by TER you will notice how they vary in price.
My rule of thumb is to only buy ETFs with a TER lower than 0.25% p.a. . There are 8 ETFs that fit that criteria.
I prefer bigger funds because they are less likely to be closed by the fund provider. They also tend to have higher trading volumes, lower bid-ask spreads and have been around for longer. You can sort by fund size to get an understanding of that.
I prefer physical replication funds because:
- It is a type of replication I understand better
- Synthetic replication involves using swaps/derivatives which means the funds are exposed to counterparts risk
- Synthetic replication is getting less popular
- Whenever there are synthetic funds available, I always find comparable physical replication funds which are similar or better according to my decision criteria.
This criteria is akin to trying to understand which bank institution is more trustworthy. It is a subjective choice made out of incomplete information.
I personally have a preference for Vanguard funds due to Jack Bogle’s work there and their overwhelming presence on personal finance books. I also tend to trust iShares ETFs because iShares is the biggest ETF company in the World and it has a broad set of offerings.
Generally if all else is equal, I will pick a Vanguard or iShares ETF. I think the other providers may be good too, they are just less popular.
Criteria I did not mention
Here are a few aspects I didn’t mention which often get stated elsewhere:
- Tracking difference – The tracking difference is a measure of how well the fund replicates the performance of the underlying index. My general experience is that popular providers like iShares and Vanguard have acceptable tracking errors. I only check tracking differences for funds/fund providers I am not acquainted with. One thing to keep in mind with tracking difference is that it changes all the time. You can check the tracking difference in this site.
- Returns – I don’t compare returns between index funds because in theory all funds should have the same performance. In practice they don’t have the same performance due to tracking difference and practices like securities lending. Don’t assume that just because a fund over-performed an index in the past that it is going to keep doing it in the future.
- Domicile – I only consider Ireland domiciled funds for world equities. You will save on US dividend withholding taxes which Luxembourg domiciled funds don’t.
- Hedging – I don’t consider hedged equity ETFs. Hedging is not very useful for risky assets like equities and it comes at an extra cost.
Given the criteria mentioned above, I detailed my preferred funds below.
iShares Core MSCI World UCITS ETF, IE00B4L5Y983, TER 0.2%
There are cheaper alternatives but at 15,830 million EUR (fund size) this fund is 4-5 times bigger than the second biggest comparable accumulating fund.
HBSC MSCI World UCITS ETF, IE00B4X9L533, TER 0.15%
At 827 million EUR in size this fund isn’t big but the comparable distributing iShares fund (IE00B0M62Q58) with 4,683 million EUR in size is just too expensive (TER 0.5%).
You can figure out the best ETF for a particular index by following these steps:
- Pick criteria on which to compare and exclude ETFs
- Describe how the different ETFs fulfill each aspect
- Choose the ETF that best matches the combination of criteria. You may not find a perfect ETF in all aspects, but you will find a good enough ETF.
My recommendations for MSCI World ETFs are iShares Core MSCI World UCITS ETF (Accumulating, IE00B4L5Y983) and the HBSC MSCI World UCITS ETF (Distributing, IE00B4X9L533).