Just for info.
If you parse the VT (they are several tools but IB offers one) you’ll see that is cheaper to have VTI + VXUS.
Like that you can balance US and non-US as you like. Is what I’m doing.
can you quantify?
as far as i remember it is something like 0.10 % TER vs. 0.10% and 0.06%, that gives you a 0.02% advantage if you weight them both equally. this compounds to a whopping 1.2% advantage after 60 years. Hence insignificant. About everything else on investing is much more important than this aspect.
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VTI: 0.03%
VXUS: 0.09%
VT: 0.09%
So you save ~0.033%.
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Comparing countries on their P/E ratios is a meaningless apples-to-oranges comparison. It makes sense only within a particular industry or for comparison across time (which is roughly what CAPE does - P over past 10y E vs current P/E).
Good quality ex-US companies are enjoy high valuations as well. Don’t assume that the market is stupid and values companies just on jurisdiction factor! For example BABA or YNDX, their P/Es are comparable to US tech giants. The issue is that the bulk of ex-US companies are value crap and traded like the value they are. US is unique with their high concentration of quality growth companies.
Brands, network effects and data moats.
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@Hedgehog was even advocating for a 3-fund portfolio, because of lowest TER and highest AUM and trading volume of these. I made a wiki post on it, there is a table which compares the 3. But the TER are no longer up to date.
Edit: I updated the table. Anyway, I don’t think that TER is the most important factor. It’s the total AUM, trading volume & total number of stocks that are more interesting.
| ETF Name | Ticker | Inception Date | #Stocks | TER | 1 Fund | 2 Funds | 3 Funds |
|---|---|---|---|---|---|---|---|
| Total US Stock | VTI | 2001-05-24 | 3’611 | 0.03% | 50% | 50% | |
| Emerging Markets | VWO | 2005-03-04 | 5’074 | 0.12% | 10% | ||
| Developed Markets | VEA | 2007-07-20 | 3’960 | 0.05% | 40% | ||
| Total World Stock | VT | 2008-06-24 | 8’178 | 0.09% | 100% | ||
| Total Intl Stock | VXUS | 2011-01-26 | 7’453 | 0.09% | 50% | ||
| Combined TER | 0.090% | 0.060% | 0.047% | ||||
| Fee for $100’000 | 90 | 60 | 47 |
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Do you know if an ireland domiciled emerging markets fund is more tax efficient than an us based fund?
I would say, you shouldn’t deviate from it, if
- you blindly want to achieve total stock market returns and
- you don’t want to think for yourself
Market capitalization is, to a great degree arbitrary. A result of corporate financing - which, in turn, is substantially influenced by politics (taxes) and regulation.
Recent case in point: Saudi Aramco, the world’s biggest oil & gas company went (partly) public - at a price that values the company at 1.7 trillion USD. Now of course just can’t take 100% of such a behemoth public overnight. The market needs to “absorb” it slowly. But suppose they did (gradually): ceteris paribus, it would then suddenly have a market cap that size.
A market cap that’s 40% larger than Apple, the world’s currently most valuable company (by market cap). Which means that, according to your logic of not deviating from market cap, I would have to allocate 3-4% (4% on the basis of following the MSCI world) of my entire equity portfolio to it. That would be more than the percentage allocation of entire countries in VT - like France (3.0%), Switzerland (2.6%), Germany (2.5%) or India (1.2%) in VT. Even approaching China’s share (3.7%).
I don’t know about you, but I’d rather invest more money in reasonably diversified economies like the aforementioned - than in one single Saudi oil company.
Agreed - it’s to be treated with great caution, at least.
That’s why Yahoo is the world’s most popular search engine and internet portal.
ICQ and Skype dominate the instant messenging market.
Blackberrys are dominant enterprise mobile phones
And Intel makes the chips that run inside them.
check out
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That’s why stock market indexes routinely use float-adjusted market capitalization.
It’s both a blessing and a curse though - when large insiders start selling their previously non-public shares, indexers are forced to buy as the float increases, and vice versa.
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I think that’s a wrong way to look at it. The allocation is not in countries, but in stock markets. And stock market size is not directly connected to the size of the economy, where it operates. You know, you could also argue that Apple & Amazon together have higher market cap than all companies domiciled in Germany, which also is hard to grasp. I mean, in public conscience one makes most money by selling smartphones and the other one is a web shop.
You give one extreme example to back your claim. I see it differently: the market cap of 1.7 trillion is not there without reason. We’re talking about huge oil reserves here. It’s best to have as much of the World’s economy included in your portfolio, so I’m happy that this company will be included.
OK, but there is no easy way around it. I especially don’t like quantitative easing, markets being inflated by central banks and cheap credit. I invest unleveraged money and it competes with highly leveraged money, which is lended at an unfair rate. But what can you do?
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Yes, allocated by stock market size.
Though that’s the argument I’m making above:
Why should you allocate according to that?
Sure, listed companies will be (on average) more strictly regulated in their business and accounting practices. But otherwise… it doesn’t say much per se about the quality of these companies.
There could be markets with great, innovative companies that have high margins and growth figures - though relatively difficult access and high barriers to going public on stock markets (due to a jurisdictions legal framework, for example), stock markets could be inefficient, etc.
And others, where the stock market is easily accessible to corporate finance, but companies are lower-quality or have lower growth perspective. Sure, there will be some correlation to the contrary (economic freedom and responsible regulation fostering the development of higher-quality companies - and, in turn, higher stock market capitalisation), but still…
Why should you allocate according to market cap?
Why should that be “best”? 
It serves only one objective I can think of: To achieve approx. the returns of the world’s total stock market.
Sure, that’s far from the worst strategy one can have as an investor in listed equity. It’s pretty good, probably. But why should it be “best”, necessarily? Also… (quoting it again, to make another point)
Allocation by market cap doesn’t even ensure that purpose all that much.
The Japanese market cap is, again, a great example: Japan made up 7.8% of VT - that’s more than double the 3.5% of China. Even though China has almost triple the GDP Japan has.
You’re not even getting “as much of World’s economy” by allocating according to market cap!
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So what would you propose? I don’t really know what the alternative is. GDP adjusted feels very wrong too.
USA: 25%
EU: 21%
China: 16%
Japan: 5.8%
India: 3.3%
Switzerland: 0.8%
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Active investors look for stock with the highest return, also taking risk into account. Market cap is the derivative of that. And you, as a passive investor, are riding on that wave.
Again, you’re cherrypicking. Would I like China to be fully included in VT? Of course! That’s why I’m happy when more and more companies get included. It’s hard to invest in some company, when there is no way to do it through a stock exchange.
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A market cap based portfolio doesn’t care where a company is based or traded. A hypothetical relocation won’t change the part it makes up in your portfolio. Furthermore, you won’t need to rebalance if one part of the world does better than the rest.
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China is a complex topic
https://en.wikipedia.org/wiki/List_of_largest_Chinese_companies - many of the biggest chinese companies are private and/or state-owned (=> driven by other motives that shareholder value) and/or you’re not even to allowed to buy them as a foreigner (A shares).
Much of GDP is also just building stuff for overseas companies, it’s the world’s factory. The brands and much of profits from the end sales and correspondingly shareholder value remains overseas. For example look at Foxconn’s market cap vs Apple’s. They may be building stuff for Apple now, but Apple’s controlling the brand and pulling all the strings. The can conceivably switch to other factories any time and end user won’t care - end user cares only that it’s Apple.
It doesn’t seem rational to me to significantly overweight the part of chinese market that you can buy based on the numbers(GDP) that have little relationship to it
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“Feels” much better to me personally.
How so? In a theoretical “efficient” market maybe, yes. Market cap is - at least to a considerable - a resolut of accessibility. Which is worse for chinese stocks than U.S. ones.
Sure, to illustrate my point by way of examples.
Especially in electronics (and smartphones all the more so) one definitely should not discount the Chinese. Companies like BBK, Huawei or Xiaomi are neither just assembling for western manufacturers - nor are they limited to developing cheap clones. They provide fierce competition to Apple for market share and sales in most markets (albeit arguably less so in Switzerland)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2633557
“A growing body of evidence suggests that the benefits of international diversification via developed markets have dramatically declined. While emerging markets still offer diversification opportunities, their public equity indices capture only a fraction of economic activity of emerging countries. We propose a diversification approach that exploits the global connectedness of developed countries to gain exposure to emerging countries’ overall economies rather than their shallow equity markets. In doing so, we demonstrate that developed markets still offer substantial diversification benefits beyond those available through equity indices. Our results suggest that relying on equity indices to assess diversification benefits understates diversification gains.”
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I have been interested in and considered equal-weight strategies. They do have their risks, including risks of overweighting certain sectors, but this can be countered by selecting.
Also, while we are at it, “misweighting” by market cap isn’t limited to countries.
It also applies to sectors. The stock market cap is hardly always reflective of “economic reality”, however many ways you are going to define it.
A glaring example would large banks and financial companies, which - by their very nature of business - are more likely to be (and thus are over) traded publicly. This is especially true of smaller “developing” markets.
For instance, according to sector weights, MSCI Poland is made up of 44% financial companies. Now I’m no admittedly no expert about Poland - but I assume that’s hardly representative of the Polish economy as a whole.
And again, yes, that would be just an(other) example. However there’s just too many such examples to conclude that market cap indexing is far from the only sensible and reasonable approach to investing (unless, of course, I am striving to replicate this very market cap index).
That’s not to say that it doesn’t have its advantages and merits. Market cap indexing through ETFs is easy, accessible, inexpensive, cost- and (often relatively) tax-efficient.
I’m still leaning to deviating from (pure) by market cap indexing, by diversifying my investments geographically and by sectors and/or industry. Though it’s harder due to lack of products. I am even considering holding my own portfolio of individual stocks, as I feel comfortable with.
There’s also sectors/industries that I consider unworthy to invest in. Like the airline industry: too low margins, too volatile, too many bankruptcies, too much dependent on political climate, government subsidies, too prone to being effected by singular events and incidents etc…
(To quickly add and make this clear: While my opinion might be straying away from conventional “mustachian” advice and therefore this forum, I am still very much on board with much: making regular savings and investments, a largely passive buy-and-hold approach, diversification and not trying to be too clever at timing or picking the market. It’s just a couple of things that I probably feel more comfortable to deviate from purely holding VT/VWRL)
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If you deviate from market cap, why wouldn’t you include known risk factors that have a higher expected return? Value and size etfs seem to be a better way of diversifing a portfolio.
Over or underweighting certain sectors or regions will not change your expected return nor the risk of your investement.
Thanks for updating and resurrecting this. AFAIK, these three simple and bare-bones portfolios still represent good choices for buy-and-hold with long time horizons and minimal hassle.
I would be inclined to give more like 55/20/25 split on the #3 to give more weight to emerging. Is this purely matter of taste or one of the two (the former or the adjusted) appears superior?
Furthermore, I am currently outside Switzerland (in EU) and work in research, which in turn limits my income a bit and means it will take me about ~3-4 years before I will cross the 100’000 USD border. In light of that, wouldn’t degiro be superior to IB? Even the fees may be somewhat higher initially, I am in favor of IB, as it offers also currency exchange which fits my needs well. With degiro, I would still go for USD based ETFs, which would incur some extra conversion costs.