Should you use new funds like the Vanguard FTSE All World ETF and SPDR MSCI World ETF in your portfolio?

The Vanguard FTSE All World ETF (Accumulating, ISIN IE00BK5BQT80) and the SPDR MSCI World (Accumulating, ISIN IE00BFY0GT14) are fairly recent funds which are suitable for the simple portfolio. The Vanguard fund exists since July 23rd 2019 and the SPDR fund exists since February 28th 2019. Should these funds be used instead of the current funds?

New funds are created all the time. When that happens you should look at them and investigate whether they are better. The most important factors to consider are: whether the fund implements your desired strategy well and whether it decreases your costs. Other factors like Fund Size/AUM and trading volume aren’t as important though worth keeping in mind.

Investment strategy

Both funds can be used to achieve the goal of the simple portfolio for equities: invest in world equities.

The Vanguard FTSE All World ETF invests in companies of the whole world.

While the SPDR MSCI World invests only in companies of developed countries. The SPDR MSCI World can be paired with another fund which invests in companies of emerging markets in order for the portfolio to achieve full coverage.

Costs

TER

The Vanguard FTSE All World ETF has a TER of 0.25%. That makes it the cheapest accumulating fund which invests in the whole world. The cheapest alternative fund, which invests in the MSCI ACWI index has a TER of 0.40% (60% more expensive).

The SPDR MSCI World ETF has a TER of 0.12%. The alternative fund I often recommend – iShares Core MSCI World ETF – has a TER of 0.2% (67% more expensive).

TER matters because it constitutes a long-term holding cost. The less you pay in TER the more you get to keep.

Trading costs

Trading costs depend highly on your broker.

Neither of these funds is part of the list of commission free ETFs in DeGiro. Note that a fund without commissions may be more expensive in the longer run, if its TER is sufficiently high.

A fair comparison of costs needs to account not only for the fund’s annual expenses (TER) but also how much you need to pay to trade it.

To compare fund’s cost I suggest using Excel.

As an example, when comparing the costs of the SPDR MSCI World ETF with the iShares Core MSCI World ETF in DeGiro we conclude that in the long run the SPDR MSCI World ETF is cheaper (even though the iShares Core MSCI World ETF has no commissions).
For this calculation I assumed an average annual portfolio growth of 4%, a monthly contribution of 1000 € and an investment period of 20 years. The portfolio of the SPDR MSCI World ETF grows to 365 401.66€ and the iShares Core MSCI World ETF to 362 984.16 €. The SPDR MSCI World ETF was worth 0.6% more.
In this example, it took 5 years of investing for the SPDR MSCI World ETF to become a better deal.

You can find the spreadsheet for this calculation here. You may adapt it to your specific case.

Comparing the SPDR MSCI World ETF with the iShares Core MSCI World ETF in DeGiro

Tracking difference

The tracking difference denotes how well a fund tracks its benchmark. There isn’t enough data on this for both funds because they are have been created recently. You’ll have to hope that the funds replicate the indexes appropriately based on the fund provider’s track record with other funds – Vanguard and SPDR are both large fund providers with a long history.

When available, I use TrackingDifferences and TrackInsight to find this information.

Fund Size / AUM (Assets Under Management)

The Vanguard FTSE All World ETF (Accumulating) is a share class within a fund which already existed (Vanguard FTSE All World ETF (“distributing”)). The share class has $577.9 million in assets while the fund has a total of $3.5 billion in assets.

The SPDR MSCI World ETF is a fund with $308,98 million in assets.

Funds with more assets are more profitable for the fund provider therefore, they have a lower likelihood of closing. In the event that the fund closes, you still get your money back but you may have to pay capital gains taxes.

According to ETF.com a fund needs $50 million in assets in order to be profitable. According to justETF.com a fund needs £100 million in order to be cost effective. Both funds are larger than these thresholds.

According to ETF.com, a fund’s size is not the most frequent reason for funds closing. The total AUM of the provider is more important than the AUM of a single fund since a large provider may be able to absorb costs in a few unprofitable funds.

Fund trading volume / liquidity

Trading volume is the quantity and total value of the buy/sell transactions that happen for a fund in a stock exchange.

This is of particular importance when trading stocks because the higher the trading volume the quicker the transaction becomes. Without enough trading volume you could end up not being able to buy/sell all the shares you want because there isn’t nobody on the other side to sell to/buy from.

Trading volume is not a crucial concern for ETFs contrary to what happens to stocks of companies. ETFs have authorized participants (i.e. APs) which cooperate with the fund to ensure that there is enough supply of shares in the stock market for investors to trade. These processes are called creation and redemption.

Nevertheless, lower trading volume can cause your transactions costs to increase if your order is sufficiently large. This is a phenomenon known as market impact. You can mitigate these costs by only using limit orders when the trading volume is low.

To find the trading volume you’ll have to go to the ETF’s page on the stock exchange’s website. Note that an ETF may be listed in different stock exchanges and you have to visit the website of the stock exchange you are using. This is an example for Xetra (“Kurshistorie” or “Price history” tab). If you are trading on Xetra you may use their metric of metric impact, XLM, instead.

Summary

  • The Vanguard FTSE All World ETF (Accumulating, ISIN IE00BK5BQT80) and the SPDR MSCI World (Accumulating, ISIN IE00BFY0GT14) are appropriate ETFs for the simple portfolio
  • When assessing if an ETF is suitable the most important factors are: investment strategy and ETF costs.
  • Aspects like fund size/AUM, trading volume, tracking difference are not as important though worth keeping in mind