Introduction:
Stocks are a key component of most long-term portfolios. Many investors choose an S&P 500 ETF (such as SPY, VOO, or SPLG - you may refer to this posting for comparison). However, those seeking more diversified exposure, including mid- and small-cap stocks, often opt for a Total Stock Market ETF (such as VTI or ITOT). While these ETFs offer broader exposure, they are still limited to the U.S. stock market. Some investors may prefer a truly diversified stock ETF that includes both U.S. and international markets.
Fortunately (or unfortunately), there are only two main contenders for the best World Stock ETF: VT and ACWI, as other options are either too small (with less than $1 billion in assets - for example, State Street's ACIM) or listed in Europe. Given that the U.S. stock market currently represents about 60% of the global aggregate stock market capitalization, I see little advantage in purchasing a Euro-denominated ETF, unless you're an investor based in a Eurozone country.
I. VT (Vanguard Total World Stock ETF)
VT tracks the "FTSE Global All Cap Net Tax (US RIC) Index," which aims to represent the performance of large, mid, and small-cap stocks globally, including the U.S., developed markets outside the U.S., and emerging markets. The index is market-cap weighted and free-float adjusted, meaning that larger companies have a greater influence, and only publicly traded shares are considered. The index is typically reviewed and rebalanced semi-annually.
For those curious, "US RIC" stands for "United States Regulated Investment Company," a U.S. investment vehicle that enjoys special tax benefits. Most US-listed ETFs are structured as RICs. The "Net Tax" label indicates that index returns account for dividend withholding taxes, which is particularly important for international investors dealing with tax obligations in different countries.
Now, let's look at the underlying holdings. First, regional breakdown (as of Sep 17, 2024):
%20by%20Neo.webp "Table-of-regional-exposure-breakdown-of-VT") |
| source: www.morningstar.com |
- North America: 64.9% (U.S. 62.3%, Canada 2.6%)
- Asia: 17.5% (Japan 6.0%, China 2.5%, India 2.4%, Taiwan 2.0%)
- Europe: 15.4% (U.K. 3.5%, Switzerland 2.5%, France 2.2%, Germany 1.9%)
- Others: 2.3%
%20by%20Neo.webp "Table-of-top-10-holdings-of-VT") |
| source: finance.yahoo.com |
As expected, the top 10 holdings are dominated by large U.S. companies, with the sole exception being Taiwan Semiconductor Manufacturing Company (TSMC).
II. ACWI (iShares MSCI ACWI ETF)
ACWI tracks the "MSCI All Country World Index (ACWI)," which provides broad exposure to both developed and emerging markets worldwide. Like VT, ACWI is market-cap weighted and free-float adjusted. It's worth noting that the "MSCI World Index", which sounds similar, only covers developed markets, excluding emerging economies so don't get confused. The MSCI ACWI is rebalanced and reviewed quarterly (February, May, August, and November).
Let's look at the regional breakdown (as of Sep 17, 2024):
%20by%20Neo.webp "Table-of-regional-exposure-breakdown-of-ACWI") |
| source: www.morningstar.com |
- North America: 67.1% (U.S. 64.4%, Canada 2.7%)
- Asia: 15.6% (Japan 5.1%, China 2.4%, India 2.1%, Taiwan 1.9%)
- Europe: 15.3% (U.K. 3.4%, Switzerland 2.6%, France 2.4%, Germany 2.0%)
- Others: 2.1%
%20by%20Neo.webp "Table-of-top-10-holdings-of-ACWI") |
| source: finance.yahoo.com |
Similar to VT, ACWI's top 10 holdings are mainly large U.S. companies, with TSMC being the only non-U.S. company.
Regional Exposure Comparison
%20by%20Neo.webp "Table-of-regional-exposure-comparison-between-VT-and-ACWI")
The two ETFs are similar in their regional breakdown but VT has slightly more exposure to Asia while ACWI has a higher allocation to North America. Both ETFs have nearly identical exposure to Europe.
Best ETF Candidates
%20v2%20by%20Neo.webp "Table-for-Comparison-world-stock-ETF-VT-vs-ACWI") |
| AUM = Assets Under Management; ADTV = Average Daily Trading Volume (# of shares); A/R = Annualized Return over 5 years; TER = Total Expense Ratio |
Let's compare VT and ACWI across 5 key parameters: (1) AUM: the larger, the better (more reliable), (2) ADTV: the higher, the better (more liquid), (3) Price: the lower, the better (more affordable), (4) A/R: the higher, the better (more profitable), and (5) TER: the lower, the better (less costly). I’ve highlighted the better performer in each category in green and the worse in orange to help you quickly identify the differences.
- Assets under Management: VT wins hands down.
- Daily Trading Volume: Despite being four times smaller than VT, ACWI's daily trading volume is more than double that of VT. This may suggest that long-term investors prefer VT, resulting in less frequent trading, while ACWI's investors may have shorter holding periods.
- Share Price: No difference.
- Annual Returns: ACWI has outperformed VT by 0.35% annually over the past five years on average, largely due to its higher exposure to the U.S. market, which has outperformed other global markets during this period.
- Expense Ratio: VT (0.07%) is substantially cheaper to maintain than ACWI (0.32%).
Conclusion
In my opinion, VT is slightly better than ACWI due to its lower expense ratio and larger AUM. While VT’s five-year annualized return is marginally lower than ACWI's, this difference is primarily due to different regional exposure rather than fund management.
Ultimately, the choice between VT and ACWI depends on an investor's preference for regional exposure and sensitivity to costs. If an investor prefers higher exposure to North America with slightly less exposure to Asia, ACWI could be a better choice provided they are not overly concerned about its higher expense ratio. Due to its low expense ratio, VT could be a better option for a long-term investor who wants slightly less concentration in the U.S. market.
Thanks for reading. I wish you success in making smart investments!
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