Hey everyone, fellow mustachian here! Glad to join the forum and further refine my personal FIRE strategy. Up until now, I have been steadily investing in SWDA (iShares MSCI World UCITS ETF) using Swissquote as my broker with a monthly savings rate of ~25%. It seemed like a great ETF to invest in, as I’m not too eager to include emerging markets in my portfolio and the performance seemed to be great as well.
Now I have been reading a lot of the posts in this forum with great interest, and it seems obvious that most of you are invested in VT with Interactive Brokers. Switching to IBKR I fully understand, and even though the task seems daunting at first because of the more complex UI, I already made an account on IBKR and have been trying to get accustomed to the new system.
Now before I move all of my funds, where I struggle is the difference in performance between VT and SWDA. Looking at historical returns, SWDA seems to come out on top, with 10% higher returns than VT (or VWRL, for the sake of comparison on justetf) over a 5-year period:
Is this just due to the inclusion of EM in VT, or is there anything else at play here? I understand that VT is distributing while SWDA is accumulating, but I do not understand if the dividends are reinvested for both funds in this comparison. Furthermore, there already is a very similar post in this forum: MSCI World UCITS ETF vs VT World Stock EFT detailing how, if the dividends are reinvested for both, the performance is pretty much the same:
So which one is it? Differences in performance due to the inclusion of emerging markets in VT and the focus of SWDA on industrialized countries, or extremely similar performance with both if one were to reinvest the dividends even though the underlying index is quite different?
I don’t quite understand if I should sell all my SWDA and invest in VT instead. Of course I should make this decision based on my own preference and research, but I don’t fully understand why everyone is recommending VT while SWDA is faring similar, if not better. There’s tax implications at stake as well, which is adding an additional layer of complexity. Thanks a lot for helping to clear up my confusion I appreciate any input!
62.06% in 5 years => 10.14% p.a.
52.87% in 5 years => 8.86% p.a.
That’s a difference of 1.28% p.a. Both performance figures include dividends.
In the URTH vs. VT chart of the last 10 years the difference was 0.89% p.a. A bit less as the underperformance of emerging markets was worse in average over the last 5 years than over the last 10 years.
I.e., it is the former, difference in performance due to the inclusion of emerging markets. I wouldn’t call this “extremely similar” performance.
Emerging markets only make up about 10% of VT, so the risk is limited but it’s certainly possible to notice a performance difference. Nobody knows the future, of course.
If you want to switch to US ETFs but want to exclude emerging markets, I don’t know whether a US-based MSCI World or FTSE Developed World ETF exists. You may have to use two ETFs, e.g. VTI (US-only) + VEA (Developed World ex-US).
I haven’t delved deeply into the composition of the SWDA index, but I assume that the performance difference can be explained by the inclusion of emerging market and small-cap companies in VT, which is not the case for SWDA (please someone correct me if I’m wrong).
However, it’s worth noting that in absolute terms, the Total Expense Ratio (TER) is significantly higher for SWDA at 0.20, whereas VT has a TER of 0.07. This means that SWDA will cost almost three times as much in fees as VT. From this perspective, the absolute performance of VT might be better, but I haven’t studied SWDA sufficiently to confirm this.
I don’t understand why you are comparing two largely different things.
The reasons to invest in VT are:
lower costs
higher diversification
return of US dividend tax
The net result of VT might have been better, when the dividends and tax return is included.
Comparisons over the last three years do not make much sense anyway - that is very short, and past returns do not say anything about the future.
You should make your choice on fundamental questions, not on returns over the past three years.
Depending on the amount invested, you could leave SWDA as it is, and start investing in VT, if the conclusion is that you want to.
I.e., it is the former, difference in performance due to the inclusion of emerging markets. I wouldn’t call this “extremely similar” performance.
Thank you @jay for the explanation Now I finally see that the performance difference comes from EM, and that it’s actually not as much it seemed to me (“only” 1.28% p.a.).
However, it’s worth noting that in absolute terms, the Total Expense Ratio (TER) is significantly higher for SWDA at 0.20, whereas VT has a TER of 0.07. This means that SWDA will cost almost three times as much in fees as VT. From this perspective, the absolute performance of VT might be better, but I haven’t studied SWDA sufficiently to confirm this.
That’s a great point that I failed to address in my post, of course it makes sense to also take this into consideration @kawansky. Thanks for your valuable input!
@SwissMousse In my head it just didn’t make sense to invest in VT when SWDA seemed to have the better return on investment over many years. Of course historical performance doesn’t predict future returns, but it just felt wrong to ignore that track record.
I’m still not completely sure if I want to include emerging markets in my portfolio as I don’t believe that they will outperform industrialized countries over the next 20 years. But hearing that EM is only ~10% of VT and taking the much lower TER into account, I’m thinking that it would probably make sense to sell my position of SWDA and buy into VT. The position is only ca.10k at the moment, as I held out with dollar-cost-averaging most of my savings until I had it more figured out. I don’t believe that I’m smarter than the 100s of people in this forum taken together, so I’m more or less convinced to make the switch to VT on IBKR
lower TER for VT
overweighting of USA in the MSCI
better diversification in VT → equal less risk (if you want to bet, then go for individual shares or specific etfs)
Please note that the last three years do not represent a ‘normal’ market. The Covid period caused a significant distortion, with everyone rushing into the market, and geopolitical conflicts added another layer of market disruption. While it’s crucial to consider these factors in the long term, focusing solely on the last three years, in my opinion, does not capture a true reflection of the market’s normal performance.
In terms of diversification, VT appears to be better balanced than SWDA, even though the EM/SC component is low. Contrary to that, I believe that in the next 20 years, being exposed to EM/SC could be an advantage because, in my opinion, the potential return is likely higher than with Big Caps (I see it more as a crypto moonshot, with a company that could suddenly gain power, but this is more speculation than investment). It’s up to you to make your choices. What matters is that you can sleep well at night.
I can’t believe this post got so many valuable responses in such a short amount of time, given that christmas is right around the door Thank you very much to everyone that commented, I highly appreciate you taking the time to help me wrap my head around this.
I have decided to transfer my holdings from Swissquote to IBKR and will start to invest in VT. It’s hard to argue against lower TER, better diversification and tax advantages compared to SWDA. If we try to take all emotions out of investing and do so based on a rational mindset, it just makes sense to be as diversified as possible. Especially since we don’t know what the future holds.
Thanks everyone, enjoy the holidays with family and friends!
This is not a track record. It is just how markets have developed in this period.
You are not alone and this is a reason why it might actually happen. Markets are usually doing unexpected things. I used to read predictions that were made for market development in the beginning of a year, in the end of the year. Now I don’t even bother with it.
So, my mantra is to focus on things that you can actually control: fees, taxes (which are also fees) and diversification.
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I appreciate any input!
Thank you very much to everyone that commented, I highly appreciate you taking the time to help me wrap my head around this.