This portfolio of Vanguard funds has a TER of 0.13% p.a.. It is currently the cheapest “All World“ portfolio using distributing UCITS funds. This article will show how you can calculate the “All World” portfolio allocation for these Vanguard funds.
FTSE and MSCI indexes
Earlier I’ve answered a similar question for the iShares MSCI World and iShares MSCI Emerging Markets ETFs.
The Vanguard ETFs from this article have a different allocation because they track different indexes.
The Vanguard ETFs track indexes from the FTSE family. While the iShares ETFs track indexes from the MSCI family. FTSE and MSCI use different methodologies for building their indexes. The key differences between these index families are:
- The indexes classify countries differently. For example, FTSE indexes classify South Korea as a developed market while MSCI as an emerging market;
- FTSE global indexes invest in more companies than MSCI global indexes. For example, the FTSE Developed World invests in 2 177 companies while the MSCI World invests in 1 655 companies. These FTSE global indexes cover more “small-cap” companies than the MSCI global indexes.
- The country percentage allocation within each family is different. For example, the FTSE Developed World has 60.4% allocated to USA and the MSCI World has 62.7% allocated to the USA.
My upcoming book explains how these Vanguard ETFs fit into a simple portfolio for European investors. This book will help you:
- Understand how to compare and choose funds for your portfolio
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Before determining the allocation of this portfolio, you need to choose an allocation criteria.
My preferred allocation criteria is: free float market-capitalization. This means:
- I want this two fund portfolio (Vanguard FTSE Developed World + Vanguard FTSE Emerging Markets) to have similar performance as the single fund portfolio (Vanguard FTSE All World).
- I will allocate based on the relative market value the financial markets attribute to these regions (Developed World and Emerging Markets).
The FTSE All World is a hierarchical index. This index is made of its parts like a Russian (Matryoshka) doll. These indexes’ market capitalization has the following relationship:
FTSE All World = FTSE Developed World + FTSE Emerging Markets.
The market capitalization of these indexes can be found in the factsheet of the FTSE All World index. You can find it in page 4 of the factsheet under the row “Net MCap”:
As you can see, if you add up the market cap of Developed Markets (45 497 375 USD) and Emerging Markets (5 511 984 USD), you obtain the market cap of All World (51 009 359 USD).
Portfolio allocation calculation
With knowledge of the market cap you can calculate the percentage of developer world and emerging markets in the whole world.
Developed World (%) = FTSE DW / FTSE AW = $ 45 497 375 / $ 51 009 359 = 89%
Emerging Markets (%) = FTSE EM / FTSE AW = $ 5 511 984 / $ 51 009 359 = 11%
In this example, we had the market cap of FTSE Developed World, FTSE Emerging Markets and FTSE All World. We really only need the market cap of 2 out of 3 because they are interrelated.
Can you use a different allocation?
Yes, you can use whatever allocation you want.
I just prefer market cap weighting because it is the most objective I have found. Also I don’t know what the future holds so, I avoid needless and baseless tinkering.
You may consider small changes to this allocation. Changes of +/- 5% in the allocation I suggested won’t make a meaningful difference in performance.
What is important is that you come up with a criteria to base your allocation decision and stick with it.
I wanted to give you a small update on the book I am writing.
I’ve written the majority of the book. Now I’m mostly revising it. So I can talk about what it covers.
The book explains the fundamentals of passive investing along with the practicalities. Knowing which ETFs to invest in is just the tip of the iceberg. The book explains why: Why investing? Why passive investing? Why these ETFs and not others?
“Why” is very important to my writing. Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime. This book is about teaching you how to fish.
I’m creating videos to go along with the book. Effective passive investors know how to navigate taxes, brokers and various online tools. These videos will cover this useful complementary knowledge.
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