Can I use a S&P500 ETF instead of a World ETF as my primary fund?

Hello :slight_smile:

I’m new here at the Mustachian community and have been reading through almost all sections very thoroughly. I now concluded that my primary fund should either be a World or a US S&P500 ETF which should be around 50-75% of my stock portfolio.

Most people seem to choose the World Index for a more diversified portfolio but I’m not the biggest fan of it. First of all, the World fund comes in at a much higher TER (0.20 - 0.25%) opposed to the 0.05 - 0.15% TER of the S&P Indexes.

Furthermore, the world fund also tracks economies that are far away from having a wealthy and prosperous future ahead. I’m referring to most of Europe which seems to be stuck in the mud (low salaries, high taxes, inefficient regulations, no incentives for business activities) so why even bother putting in money there? This refers to most nations of the European union.

I understand that with the US Fund I’m “betting” on a single country but it does represent more than 50% of the worldwide cap and is heavily involved in international transactions. The US is also a highly attractive place for business and innovation so it will continue to generate wealth.

If I absolutely must diversify my portfolio beyond my home countrry (Switzerland) and my main fund (US), I thought about either adding an emerging market or an Oceania + Hongkong / Singapur fund. Then again, both have high TER, high volatily (emerging markets) and an uncertain future (Oceania / Hongkong / Singapur.)

What are your thoughts and evaluations?

If you invest in American ETFs, then VT has only 0.11% TER.

You say that European economies are not worth investing in, but the price of VEUR soared in 2017. The market makes their decisions on what is worth investing in and what not and this has an effect on the current price. If it was so obvious that Europe is doomed, wouldn’t the price drop?

American GDP is 20% of World GDP, but their stock market is worth 50% of the global stock market. If you put 100% of your money there, then you make a bet that USA will at least keep up with the World and keep the 50% share.

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There are two popular views on this topic and there are index investing authorities supporting both opinions:

  • John Bogle, for example, thinks that US market is a proxy to the global market because half of the income of American companies comes from abroad, and the VTI is cheaper (0.04) than VT (0.11), so he thinks investing in US is good enough diversification.
  • Burton Malkiel, on the other side, thinks that even if you invest in VT, you still overweight US and underweight some EM (for example China), because VT doesn’t include many companies that access to is difficult or doesn’t fulfil the standard requirements (in case of China it’s most of their market in fact)

It’s a bit matter of taste because there are good arguments to go both ways. I’m personally on Malkiel’s side and I have VT ETF and I’m planning to buy a better diversified EM (especially China) ETF to better reflect the world market capitalization.

You can compose your portfolio to underweight the countries with excessive regulation and taxes (like EU countries) and/or aging populations (like Japan), but I’d recommend not omitting them completely.


PS. As far as I remember @hedgehog mentioned once that he’s not invested in EM because he doesn’t believe in China. I don’t remember his rationale behind that decision, but this proves that you can have very different portfolios depending on your ideas/convictions/preferences.

@hedgehog once said:
Buying USD in CH online

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From an ETF standpoint (excluding my “Global 100” 3rd pillar with VIAC), I’m 100% invested in VTI for the foreseeable future. I’m a big believer in keeping things simple and for this reason lean more toward John Bogle’s way of thinking: I don’t lose sleep over whether or not the US provides enough diversification.

The question I asked myself is similar to what @Bojack proposed above: do I feel more comfortable investing today with the assumption that the US “will at least keep up with the World and keep the 50% share”, or with the assumption that it will not? For the time being I feel more comfortable with the former. Plus I don’t have to re-balance :smiley:

This is purely a personal preference. Although I’m comfortable with it, I suppose I might have difficutly recommending it to a family member or friend. And full disclosure: there are other components of my savings/investment strategy (e.g., Swiss pension, discounted employee shares) that likely provide additional comfort for taking this approach.