We road test 12 popular Global share ETFs, comparing them across 5 factors.
International share ETFs and U.S. share ETFs have had a huge increase in popularity for individual and SMSF investors in Australia.
As of September 2019 there is almost $25 billion invested in ETFs tracking global shares on the ASX, representing almost half of the Australian ETF market. The largest and most popular track either a broad global index or the U.S. share market which is considered to be a proxy for global shares.
Each year we compare all 200+ ETFs in ourETF Report. Here we road test 12 popular Global share ETFs, comparing them across 5 factors, as well as summarising our favourites.
ETFs track a market index rather than taking bets on individual companies. For this reason, their management fees are much lower than typical active fund managers. Tracking a market index also offers the benefits of transparency and potential tax efficiency.
ETF investors directly benefit from share capital gains, dividends and franking credits paid by shares contained within an ETF. The majority of funds compared in this article are index ETFs, only the Magellan fund is an active fund which sits inside an ETF-like listed structure.
We have included the Magellan fund because of its size and popularity however, investors should understand that this is an actively managed fund. This article explains thedifference between active and index investing.
*Total fund assets under management at 30 September 2019.
There are 6 global share ETFs with over $1 billion under management (IOO, IVV, MGE, VGS, VEU and VTS). The S&P 500 ETF (IVV) has been the most popular, attracting $3.2 billion on the ASX.
The US share market has outperformed other global markets over the last 5 years so investors have gravitated to this market for their global exposure. The unhedged global ETFs (IOO, IVV, MGE, VGS and WXOZ) have drawn in more funds than their hedged equivalents.
This would suggest that Australian investors are comfortable with the addition of currency diversification when they invest in global shares. A falling Australian dollar has also made the unhedged ETFs more attractive over the last 3 and 5 years.
Overall there is $12.8 billion invested in the 12 largest global ETFs. For the Stockspot Portfolios we have invested our clients into the S&P Global 100 ETF (IOO).
Our clients also have the option to add the S&P 500 ETF (IVV) for extra US shares or the All-World Ex-US ETF (VEU) for extra non-US shares as part ofStockspot Themes.
You can skip ahead toStockspot verdictto see why weve selected these funds for our clients and how theyve performed.
Management fees for this group of ETFs varies widely, from 0.03% for the Vanguard and iShares US share ETFs to 1.35% for the Magellan active fund.
The pricing for the index funds have been driven by competition, with new ETFs tending to be launched at lower pricing than previously listed similar funds to gain new flows and switching.
The Vanguard products will continue to put fee pressure on iShares and SPDR, particularly where similar Vanguard funds exist. WXOZ and IOO have higher fees than VGS although WXOZ and IOO have performed better even on an after-fee basis.
Slippage refers to how much you lose by crossing the spread when buying or selling an ETF. Its calculated by the average percentage difference between the best buyer and seller during market hours.
It has more of an impact if youre trading an ETF or making regular contributions because youll need to cross the spread more often to get invested.
Slippage tends to be higher for global ETFs when compared to Australian ETFs since many global markets are closed when the Australian Securities Exchange (ASX) is open.
This leads market makers to maintain a wider spread during ASX hours. VGS currently has the lowest slippage at 0.05%. By comparison the average Australian Share ETF also has a bid/ask spread of 0.05%.
Index ETFs generally have lower slippage than active funds which means investors in index funds arent starting as far behind the 8 ball when they invest.
For example, a round-trip of buying, holding and selling the Magellan Global Equities Fund (MGE) over the last 3 years would have incurred 2 buy-sell spreads plus management fees which totals 4.63% of costs (thats before performance fees).
The fund has generated net returns of 64.6% which means that an investor holding for 3 years would have paid away over 7% of their net return in costs.
By comparison an investor in IVV over the same time period would have round-trip costs of 0.25% compared to a net return of 65.2% so only paid away 0.4% of their return in cost.
Thats one fifteenth of the Magellan fund costs paid by the index ETF owner including getting in and out!
It shows why active funds management as an industry is much more lucrative for the fund managers than the end investors. Fred Schwed wrote about this timeless concept in one of the best investing books of all timeWhere are all the customers yachts?.
Liquidity refers to the amount of turnover (or available turnover) in an ETF. We measure it by average daily volume on the ASX. Volume is a measure of market making activity and trading interest which makes it a reasonable estimate of liquidity.
Its worth mentioning that it may not reflect liquidity in the underlying stocks which is typically much deeper for broad global share ETFs.
However in times of crisis and during ASX trading hours investors may not be able to rely exclusively on market makers for liquidity so daily volume is a relevant figure. Liquidity closely matches up with ETF size.
Eight of the largest global ETFs turn over more than $1 million dollars worth of volume per day.
ETFs with more U.S. share market exposure (IVV and VTS) have produced the best 3 year returns while the funds with the lowest U.S. exposure (VEU) have underperformed.
U.S. shares have had strong 3 and 5 year returns thanks to the performance of shares like Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG), Berskhire Hathaway (BRKB) and Facebook (FB).
The outperformance of US shares vs the rest of the world has historically been cyclical so is likely to reverse at some point in the market cycle. In March last year we wroteWhy tech shares are hot but could be dangerous.
In recent months European, Australian and Asian share markets have started to perform better than the US and tech shares have slumped.
Of the broad global ETFs without a specific US focus, IOO (18.23%) has performed better than VGS (15.19%) and WXOZ (14.82%). The unhedged versions of each of these ETFs have beaten the hedged versions due to the Australian dollar falling.
The Magellan active fund (MGE) has performed well compared to the broad global ETFs, but many other active managers in this space have underperformed the S&P500 ETF (IVV).
It shows again why the benefit of active funds management generally accrues to the manager rather than the end investor. Its no wonder92% of US active fund managers underperformed the index over the last 15 years.
This is the key reason we avoid active funds for our clients. Indexing tends to do better than active management due toinvesting being a zero sum game.
Since 2014 weve invested on behalf of our clients into the S&P Global 100 ETF (IOO).
The fund invests in the largest 100 companies in the world so provides great diversification across the worlds largest and most successful businesses which are predominantly located in the US, UK, Switzerland, France, Germany, Japan and Korea.
Despite slightly higher fees than other options, this funds focus on large companies has been the driver behind IOO outperforming the similar broad global ETFs: VGS and WXOZ.
This has meant our clients have earned an extra 2.2% over 1 year and 9.4% over 3 years by being in IOO rather than VGS.
You can seeStockspot Portfoliosfor more details on what other ETFs are inside the portfolios.
We continue to favour IOO for our clients due to its size, track record and exposure to the worlds largest 100 companies. However we expect iShares and SPDR will need to be more competitive on fees or risk losing funds to the more competitively priced Vanguard funds.
For clients who want to add extra U.S. shares to their portfolios we offer the iShares S&P 500 ETF which can be added as a theme. Its currently our most populartheme, likely because of its strong recent performance.
For those looking to invest globally but who would prefer to avoid U.S. companies, we offer the Vanguard All-World ex US Shares Index ETF. It hasnt performed as well over 5 years but is more insulated if tech shares or the U.S. economy falter with more even diversification across Japan, the UK, China, France, Germany, Switzerland and Canada.
Its wonderful to see such a broad range of Global ETF options available for Australian investors. Well continue to review the global ETF universe to ensure our clients get access to the best options available based on our careful analysis.
Enjoyed this read?See our analysis of theBest Australian share ETFs
Find out howStockspotmakes it easy to grow your wealth and invest in your future.
Clients sometimes ask us how we built the Stockspot portfolios, and why we selected 5 assets.
Well show you why and what we look out for when selecting a bond ETF.
The role of shares, bonds and gold in your portfolio
We explain the role of each asset in your portfolio and how they can balance each other.
Chris has been vocal in calling out the industry Fat Cats and is known for telling it as it is. He sits on two Advisory Committees for the industry regulator ASIC, and was previously a fund manager at UBS. He holds a Bachelor of Commerce (Accounting/Finance Co-op Scholarship) from UNSW.
Get your free personalised portfolio recommendation
Receive the free Stockspot monthly newsletter and updates
Stockspot Pty Ltd ABN 163 214 319 is a Corporate Authorised Representative (No. 453421) of Sanlam Private Wealth (AFS License No. 337927). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs except in circumstances where you have provided your personal financial details via our online application process and received a Statement of Advice from us. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us. © 2019 Stockspot