Investors have never had it easier when building a diversified portfolio of global stocks. Market-cap-weighted U.S. and foreign 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.
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 of time. 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 U.S. and international stock funds. While the split tends to hover around 50/50, 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.The split between U.S. and foreign stocks can have an impact on the fund’s risk profile. Heavy exposure to foreign stocks can make this fund more volatile than a portfolio composed of only U.S.-listed stocks. This additional volatility comes from fluctuations in foreign exchange rates. Like many of its category peers, this fund does not hedge its currency risk. Investors who are concerned about this additional volatility may want to control their exposure to foreign and U.S. stocks with separate funds.Market-cap-weighting skews the portfolio toward the largest stocks while underweighting those that are smaller and cheaper. This fund’s largest holdings are multinational firms, including Apple and Johnson & Johnson. Foreign companies like Nestle and Tencent also land in the top 20 holdings. While large caps dominate this fund, the inclusion of small-cap stocks improves diversification.The fund’s country and regional weights are similar to the category norm. 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. The average market capitalization of the fund’s holdings is also similar to the category norm, as is the portfolio’s sector composition. Financial and technology stocks are the largest sectors and account for 18% and 16% of this fund’s holdings, respectively.Portfolio Construction
This fund tracks a broad market-cap-weighted index of stocks from developed and emerging-markets countries. It effectively diversifies risk and promotes low turnover, earning a Positive Process Pillar rating.This fund’s benchmark, the FTSE Global All Cap Index, targets stocks representing the largest 98% of the global stock market by market capitalization. Buffer rules are used around this cutoff to mitigate unnecessary turnover. Holdings are weighted by market capitalization, which further mitigates turnover and the associated transaction costs. This approach also reflects the market’s view of each stock’s relative value and reduces exposure to stocks as they become smaller and cheaper while tilting the portfolio toward large profitable companies. The index is reconstituted semiannually in March and September. Qualifying stocks must also meet liquidity requirements to make the index easier to track. The managers employ full replication to achieve their index tracking mandate.Fees
Vanguard recently cut the expense ratio on this fund to 0.11% from 0.14%. This is one of the lowest expense ratios in the world large-stock Morningstar Category and supports a Positive Price Pillar rating. Vanguard also offers this fund as a mutual fund, which charges 0.21% and has a $3,000 investment minimum. 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.Alternatives
IShares MSCI ACWI ETF is a close competitor to VT and has a Morningstar Analyst Rating of Bronze. It covers global stocks from developed and emerging markets but focuses on large- and mid-cap companies. Like VT, its holdings are weighted by market capitalization. This fund charges a higher 0.33% expense ratio.Investors who want access to global stocks but are more risk-averse might consider Vanguard Global Minimum Volatility Fund . This fund uses an optimization approach to construct the least volatile portfolio of global stocks, subject to several constraints. It attempts to keep country and sector weights close to those of the cap-weighted global market portfolio. This fund also hedges its foreign-currency risk, which should help further reduce its volatility. It charges an expense ratio of 0.17% and has an Analyst Rating of Silver. iShares Edge MSCI Minimum Volatility Global ETF (0.20% expense ratio) is similar to VMNVX and has a Morningstar Analyst Rating of Silver. It also uses an optimization routine to construct the least volatile portfolio of stocks, but, unlike VMNVX, it does not hedge its currency risk.
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