Indeed they do. You don’t even need to supply the second link, because it’s already visible on the first chart. The ACWI IMI is the all country world investable markets index. That covers like 99% of all publicly traded stock. So it also includes small caps. What I meant to say is that Small Caps has a market cap of 6 billion USD, whereas ACWI IMI has 53 billion. So small caps have a share of only 10% of ACWI IMI or VT, plus they give a return that looks like an amplified version of the large and medium caps. This means that in the end the difference between VT and VWRL is very small.
But of course, if you decide to overweigh small caps, like you did (20% instead of 10%), then it’s a different story.
That’s true, it looks impressive. But if you look at what happened to small caps in 2008, you will see they dropped down to the level of ACWI. I’m curious to see what will happen to them during the next big crisis. I dare say they will get hit by it in a greater way than large caps. You get nice growth during bull market, but also big drops during bear.
You don’t need to get crazy at digits and rebalance every month, you can simply adjust ratios every 3/6 months buying more (or less) shares of one of the two ETFs
Thanks @Bojack I think your last paragraph provided a key pointer.
If one wants to maintain a pre-defined fixed portfolio weight, say for e.g. VTI 50%, VXUS 40% and BND 10%, then it is required to do rebalancing every month when the fixed sum investment is made (taking into account existing market value). Maybe the term “fixed sum investment” wouldn’t be appropriate as one is essentially then doing dollar value averaging to keep the pre-defined weight same (?).
If one wants to simply replicate VT, then the important thing is to get the starting ratio correct in the initial gross investment (for e.g. VTI 56% and VXUS 44%) and then the portfolio will rebalance on its own (?).
I guess this is what it boils down to. I am still a bit confused on how the monthly investments will work out. For e.g. after the initial ratio is set and one wants to invest a fixed amount (say 8,000 CHF) every month, does one just buy 4,000 CHF worth of VTI and 4,000 CHF worth of VXUS?
Please excuse me if this query sounds overly simplistic. I am really interested in learning these core basics from the wealth of experience and knowledge here. Thanks!
required? no, I think not. My 6-fund-world-portfolio is free floating since the beginning of the year as i am currently saving cash for later expenses, instead of investing it. after 6 months, the largest deviations are VXF (USexSP500) with +0.74% and VWO (EmMa) with -0.79% from the intended allocation.
If you invest your money every month, you will hardly see such deviation.
you should have a rock solid, strong reasoning to not just buy VT. I don’t see one, but that doesn’t mean there is none. TERs for example, but that’s quit minor in thos low-TER regions
i made a google sheet to answer this question. make yourself a copy, put in the tickers and allocation you want and play with it. it tells you exactly where to put your money each month.
flexibity (ability to overweigh or underweigh USA)
You know, maybe in the end all these sum up to something like 0.2% difference. So for portfolios under 100k it’s just pennies. But for larger portfolios I would say it makes sense. It definitely makes more sense for Americans, because they are better off being able to overweigh USA.
With such low values as 0.1% or 0.2% you can forget about compounding.
0.1% off an initial 100’000 CHF gives 100 CHF every year, 2000 over 20 years. And compounded its 2019
We are talking about pennies here. Let’s not get distracted from the main points: saving money and investing it! This makes a huge difference compared to choosing Irish or American ETFs, or not rebalancing, or other “first world problems”
When not aware of the power of compounded interest, I would be more humble giving advice.
Let’s assume an investment of
100’000 without further savings/investments
200 is the price per year of TER 0.2% difference for this sum.
Historically, a return of 8% was realistical for investing in shares. The return (200) is invested annually.
This gives 475’900 in total after 20 years.
Without the 200 we have 466’000.
The difference is 9900 in Francs.
This equals 990’000 in Franc-Pennies (Rappen).
This is, of course, without cost but also without further investing.
You are right, I have not thought about how this 0.1% will grow thanks to the 8%. Please forgive me for spreading ignorance so confidently
I guess this formula should be correct (works in google search):
100000 * 108% ^ 20 = 466095
And if we got the extra 0.2%:
100000 * 108.2% ^ 20 = 483665
That’s even more than you got, so forgive me, no pennies indeed!
However, I guess where I wasn’t totally wrong, is that splitting VT makes you save 0.1%, but you can achieve much more by focusing on increasing your savings rate or income.
And it is to our (my) advantage that you are reminding me (us) of not loosing sight of this key point.
In fact, with a savings rate of 75% and your nice monthly savings amount, you are so well set on the way to FiRe that not even the gyrations of the stock markets will change that much. Whether the returns are 4 or 8 percent in the next 10 years pales in comparison to your contributions.
You would probably even welcome a lower yield, as the assets would appreciate less quickly, getting you more bang for the buck.
Please understand that I find it simply interesting to deepen my understanding of the workings and effects of the financial stuff.
This will sound like an easy question for all of you, but what is the rationale on your side for keeping your investments on SIX exchange? I assume the choice to keep CHF as currency is to avoid FX costs?
My reasoning behind as European investor is the following : I am of the opinion that global portfolio is the least risky way of investing. There is no accepted economic theory that i am aware of that buying some part of the global portfolio is less risky than buying the global portfolio. You can argue that as an American investor you may want to tilt towards US equity which is fine because in my opinion is the only country in the world where you can have a home country bias yet have a very diversified portfolio in terms of industries as well as individual stock holdings. However as a European investor I believe Holding Total World is the logical end-point of a diversify , less risky equities strategy. Now in theory you can implement this strategy in many different ways :
Is true that the combine ER of VTI + VXUS is lower than VT but Vanguard’s VT expense ratio has been dropping, so the argument that you’re better off with several funds to build the equivalent as time passes it has less importance. Also you can argue that when deciding between two or more funds, it is wise to consider Occam’s Razor: Other things being equal, simpler explanations are generally better than more complex ones. In favor of VTI + VXUS is that you have the possibility to tilt towards US market. In fact
many American investors think than US equities will continue over-perform overseas equities…
You could also split VTI in Vanguard FTSE Developed Markets ETF (VEA) + Vanguard FTSE Emerging Markets ETF (VWO) Compared to VXUS, by holding VEA + VWO you appear to get a larger number of stocks, lower overall expense ratio but VXUS has more “simplicity”, but if that is the goal and you are ok with less stocks and higher ER, wouldn’t you just be using Vanguard Total World Stock ETF (VT)?
The point I trying to make is that there are many roads to dublin .The world cap protect you against the risk of guessing wrong, and I think will return a solid return . In the long term and in practice any of the implementations of this strategy will be ok.
Now regarding US domiciled ETF vs Ireland domiciled etf , is a long-discussed topic in this forum and I agree with the opinion that as a Swiss residents we can benefit from swiss-american tax treaty and US domiciled ETF + non Swiss brokers (in my case IB) is the perfect combo to optimize taxes.
Currently if you want to mimic VT using VTI + VXUS you need to allocate 55% VTI and 45 % VXUS.
Then, when is time to rebalance your portfolio the objective is to maintain a consistent world cap allocation of your equity classes , changing the allocation if the have deviated away from world cap ratio back into line
Thanks for the great answer! I understand it a lot better now! A few additional points/questions
1- Sorry for the lack of clarity. As of now, I only use Postfinance (which I understand is based on Swissquote) since they offered free trading costs of 500 CHF and it was the only platform I have ever used in CH. Am I right to assume that it would make less sense to purchase VT through a swiss broker? Also I have the feeling that there are high FX costs. Just tried and did the maths and it was roughly 1%!
2- I read the forum on tax but not sure about that one: ok there is a 15% withholding tax on VUSA for the dividend. However I would assume that this is also applicable for VWRL at least for the US stock part? Since I believe VUSA TER is 0.09% VS. 0.25%, in the end the difference would be little in terms of costs between the two ETFs no?
3- As far as the strategy is concerned for someone like me who would like to be really passive, what do you mustachians think? Is it important to always invest the same amount of money at regular time intervals or it can warry? I was thinking of a fix sum every 6 months to absorb variations.
4- I am a bit scared of the CHF getting stronger over time and then eating the profits made by the ETFs? Is this reasonable or in theory this would be offset by purchasing at regular time intervals long-term.
Honestlly, this is the lesser evil. SIX exchange for lower stamp duty and CHF for currency exchange fees.
I’m well aware that IB (and US domciled ETFs) would be overall cheaper but simplicity of Corner Trader made me start investing, that’s most important. Also, I used up my capital for an apartment purchase so I have no significant initial amount to start with. It will indeed take me some time to reach and exceed 100k. I will eventually open an IB account and perhaps keep both in parallel. I have calculated that with higher trading costs and higher fund TER compounded for 20 years I’m looking at a difference of around 20’000 CHF in favor of IB or in other words 2.5% of my capital in 20 years.
As a side note, the cowboy approach of US administration to finances (introduction of FATCA etc.) adds a layer of insecurity which I’m not ready for at the moment.
Well, if people opt for the Swiss brokers and SIX-listed ETFs, it’s for the sake of simplicity. I agree, if you have a bank account at PostFinance and open a depot there, buy som VWRL on SIX, then it’s really easy.
But of course you pay a price for that. You have higher broker fees, you have currency exchange fees, you have stamp duty for using a Swiss broker, you can’t reclaim withholding tax from USA. 1% for currency exchange is just unacceptable. It’s a huge cost.
The withholding tax is not included in the TER. It is deducted from the dividend. You can check on Vanguard’s website that it pays e.g. $1.00 per share on March 24 2018. But when you have VT, you will only get $0.85 and $0.15 will go to uncle Sam. When you own VWRL, you will receive the whole dividend, but it will be 0.85 from the start. The withholding tax that Vanguard paid to USA for the US-part of the ETF is hidden.
Actually, I’ve got a question. Here’s a chart from MarketWatch, which compares the relative price change of VWRD vs VT and VUSD vs VOO. As you can see, the two pairs are almost glued to each other.
So why are the European versions not lagging behind due to higher TER?
And why does VWRD not differ a bit from VT, due to not having small caps?
When I was looking into VWRD I noticed it had an excellent tracking difference of ~-0.25%, so effectively “negating” TER. This might be reason. I’m not exactly sure what the TD of VT is though, I think something around 0.09%
It could also be that the charts are shown without TER?
If I understand correctly, the chart is showing the price, the closing price from the exchange. On one hand, it makes sense that it’s identical, VOO and VUSD track the same thing. But where is the TER?
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