The FTSE Developed Net Return Index includes approximately 98% of the equity market capitalisation of 24 developed-markets countries. The index is composed of approximately 2,120 stocks. Components must meet minimum criteria for liquidity, as well as foreign ownership restrictions. The securities are weighted by free-float market cap. The index is reviewed and rebalanced quarterly.
The United States accounts for approximately 60% to 65% the index value, followed by Japan (8%-10%), the United Kingdom (6%-8%), and France (3%-5%).
The index's largest sector is financial services with a 18%-20% weighting, followed by information technology (17%-19%) and healthcare (11%-13%).
Portfolio concentration is very limited, with the top 10 holdings accounting for 10% to 12% of the total index value.
Go To Top
With an ongoing charge of 0.18%, this Vanguard ETF is in one of the cheapest passive options.
Index funds should provide the returns of their benchmark, less fees. However, this ETF has outperformed its benchmark. This is due to the quality of portfolio optimisation, which is unique to each individual provider. It can also be attributed to the fact that the ETF is domiciled in Ireland and enjoys a lower dividend withholding tax rate in comparison with the index.
The ETF's annualised tracking error has been relatively low. Tracking error is a measure of how consistently a fund tracks its benchmark index. The closer the tracking error is to zero, the better or more efficient the fund is. Investors should also consider trading costs, including bid-ask spreads and brokerage fees, when buying and selling the ETF.
Go To Top
The ETF employs a close to full-replication approach to track the performance of the FTSE Developed Index. Portfolio managers seek to add value by minimising costs and cash drag. For instance, to limit market impact, they try to anticipate index changes and corporate actions and trade a few days before and after the change takes place.
To limit cash drag caused by dividend payments, the managers use futures for an amount equivalent to up to 1% of the ETF's value. Client portfolios are managed where the clients are located, but trades are executed locally.
This ETF engages in securities lending. As a general rule, the amount of assets that can be lent out by a fund at any given time is capped at 15% of net asset value. The securities-lending programme accepts noncash collateral in the form of five sovereign debt securities, including US Treasuries, UK gilts, German bunds, French OATs, and Dutch sovereign debt securities. Vanguard requires 102% collateral for all loans, and 105% if the underlying currency of the security on loan is different from the underlying currency of the accepted collateral. To reduce operational risk, each security on loan is marked-to-market daily. The current securities-lending revenue split is 90/10, with 90% of gross revenue returned to the ETF and 10% paid to J.P. Morgan, the lending agent, which also provides full indemnification on all securities-lending transactions.
Vanguard has become one of the largest money managers by giving fund owners a fair deal, straight talk, and strong performance overall. The source of Vanguard's competitive advantage and the foundation of its culture is its mutual ownership structure. Shareholders own Vanguard through their funds, which compels the firm to operate at cost rather than for profit and to put investors' interests first.
Go To Top
Vanguard FTSE Developed World ETF is a solid choice for adding core developed-markets equity exposure to an investment portfolio.
The FTSE Developed Index aims to represent approximately 98% of the global developed equity market. By construction, in comparison with the average offering in the global large-cap blend equity Morningstar Category, which includes actively managed funds, the FTSE Developed Index has a slight overweighting in mid-caps at the expense of large and giant caps and an underweighting in emerging markets. It, however, stands as an adequate representation of the opportunity set available to investors.
At 0.18%, this exchange-traded fund is among the cheapest options within the category.
The ETF has shown above-average risk-adjusted performance during the trailing three-year period when compared with peers in the category. Its benchmark has also delivered strong risk-adjusted performance over five and 10 years, well above the category average.
Additionally, this optimised Vanguard ETF has outperformed its benchmark. We attribute this to the quality of its portfolio optimisation as well as the fact that it is domiciled in Ireland, which allows it to reclaim dividend withholding tax from a number of countries.
We also hold a positive view about the parent company. The source of Vanguard's competitive advantage and the foundation of its culture is its mutual ownership structure. Shareholders own Vanguard through their funds, compelling the firm to operate at cost rather than for profit and ensuring that investors' interests come first.
To conclude, we have a positive view of the strategy as defined by the FTSE Developed Index, as it is broad, diversified, and representative of the opportunity set available to investors. The ETF is also one of the cheapest options offering global developed equity exposure. For these reasons, we have awarded it a Morningstar Analyst Rating of Silver.
Go To Top
The FTSE Developed Index is made up of large-, mid-, and small-cap companies. About 60% of the ETF's assets are invested in stocks listed in the United States. It also has significant exposure to Japanese stocks, which account for about 8% of the portfolio. But the countries where its holdings are listed are not necessarily indicative of the portfolio's economic exposure. While most of these firms do a lot of business in their own countries, the largest holdings tend to have global operations.
The FTSE Developed Index's overweighting in the US and the lack of emerging-markets exposure relative to the category have been a drag, but nevertheless, the ETF retained its position as a top performer over the past three years. In addition, as this is an index strategy, its portfolio managers keep it fully invested at all times, which provided a tailwind relative to the category over the past five-year bull market. However, maintaining a close to zero allocation to cash has the opposite effect in falling markets and might cause the ETF to underperform its category peers.
Market-cap weighting skews the portfolio toward the largest stocks in the world, such as Apple, Microsoft, Amazon, and Facebook. But the average market cap of its holdings is like the category norm. There are no limits on sector or country weightings, but the ETF's broad reach helps diversify risk. It includes approximately 2,120 stocks, and the top 10 holdings represent only 11% of its assets.
Many of the ETF's holdings enjoy durable competitive advantages. Of the holdings that Morningstar equity analysts cover, 82% by market value carried a Morningstar Research Services Economic Moat Rating of either wide or narrow at the end of January 2019, which was comparable to the category average.
Investors looking for more-comprehensive exposure to global equities, including emerging markets, can choose broader indexes such as the MSCI All-Country World or FTSE All-World. Emerging-markets stocks constitute around 10% of these indexes' weightings. The MSCI ACWI covers approximately 85% of the world's investable market capitalisation, and the FTSE All-World covers 90% to 95%. The FTSE Global All Cap Index, which also includes emerging-markets exposure, covers close to 99% of the global-equity space.
Go To Top
Although there are no direct alternatives, European investors are offered a wide choice of passive global-equity funds.
One of the best options is iShares Core MSCI World ETF. Its ongoing charge is only 0.20%, and it has delivered the best overall total returns versus the MSCI World index. Another worthwhile alternative is the synthetically replicated Lyxor MSCI World ETF (0.30% ongoing charge), which has also exhibited some of the highest benchmark-relative returns.
Also available are funds offering even broader exposure by combining developed and emerging economies. Vanguard FTSE All-World ETF (ongoing charge: 0.25%) is the cheapest (in terms of fees) and provides the broadest exposure in this category. As such, it may represent a better option than MSCI ACWI ETFs, all of which we believe are expensive. The FTSE All-World Index offers access to approximately 90% to 95% of the world's investable market capitalisation, against 85% for the MSCI ACWI. Emerging countries account for approximately 8% to 10% of the exposure.
Go To Top