Vanguard FTSE All-World ETF: May 2024 update

• Vanguard is a pioneer in index investing and launched its first ETF in 2001

• This ETF offers exposure to a broad range of countries all over the world

• It’s tracked the FTSE All-World Index closely since launch

How it fits in a portfolio

An ETF is a basket of investments that often includes company shares or bonds. They tend to track the performance of an index such as the FTSE All-World Index and trade on stock exchanges, like shares. This means their price fluctuates throughout the day.

The Vanguard FTSE All-World ETF offers a low-cost solution for tracking the performance of the FTSE All-World Index. It invests in a range of large and medium-sized companies across the globe from developed and emerging markets. Emerging markets offer investors greater potential for growth, but they can be subject to more price volatility and are higher risk than their more developed counterparts. While having a global focus, the fund is heavily weighted in companies from the United States.

An ETF is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. ETFs that have a larger weighting to the US could be used to diversify a long-term global investment portfolio, including those focused on other regions such as the UK, Europe or emerging markets.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 45 years ago. It now runs some of the largest index funds in the world. Given its size, it has a big investment team with the expertise and resources to help its ETFs track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team. They’re spread across three investment hubs around the world – the US, UK and Australia. This team-based approach means there’s no named manager on the ETF. As a collective team, Vanguard has run this ETF for 12 years.

Vanguard also has a trading analytics team, which is responsible for ensuring the ETFs buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the ETFs track their benchmarks as tightly as possible.

Process

This ETF aims to track the performance of the FTSE All-World Index. It does this by investing in most of the companies in the index but not every single one. The ETF was made up of 3,666 companies at the end of April 2024 versus 4,293 in the index. Smaller companies can sometimes be difficult or more costly to trade which can negatively impact performance. The team exclude these companies from the ETF to help run it more efficiently. This is known as partial replication and helps keep performance close to the index while keeping costs as low as possible.

The ETF currently has a large weighting of 26.0% in the technology sector, which is driven by 61.6% exposure to the US where there are household names like Microsoft and Apple. After the technology sector, the financial and consumer discretionary sectors made up 14.6% and 13.7% of the ETF respectively at the end of April 2024. Despite a large part of the ETF being invested in the US, it invests all over the globe in countries like Japan, the UK, China, France and India.

Reducing costs is a key part of keeping the tracking difference between the ETF and the benchmark to a minimum. In any ETF, factors like taxes, dealing commissions and spreads, and the cost of running the ETF all drag on performance. To help keep these costs down, the team aims to make large investments in companies instead of lots of small transactions.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can be used to offset some of the costs. They will only lend securities to a limited number of high-quality approved dealers. They indemnify the fund against any loss from this process, meaning there should be no negative impact on investors. However, stock lending is a higher risk approach.

As this ETF is listed offshore investors are not usually entitled to compensation from the UK Financial Services Compensation Scheme.

Culture

Vanguard is currently the second largest asset manager in the world and runs around $8.6trn of assets globally as of March 2024. The group aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products.

Jack Bogle founded Vanguard in 1975 and it’s owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than taking a shot at picking individual companies which may beat them.

The team running this ETF works closely with other equity research and risk departments across the business. They have daily and weekly meetings to discuss ongoing strategy which could add good support and challenge on how to run the ETF effectively.

ESG Integration

Vanguard is predominantly a passive fund house. While it has offered exclusions-based passive funds for many years, it has lagged peers in offering passive funds that explicitly integrate Environmental, Social and Governance (ESG) criteria by tracking indices that tilt towards companies with positive ESG characteristics, and away from those that don’t.

Vanguard’s Investment Stewardship team carries out most of the firm’s voting and engagement activity. Their stewardship activity is grounded in the firm’s four principles of good governance: board composition and effectiveness, oversight of strategy and risk, executive compensation and shareholder rights. The Stewardship team produces frequent insights on their engagement activity at both a corporate and governmental level.

Vanguard courted controversy in 2022 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. It claimed its decision would improve clarity for investors and allow it to speak independently. We view this as a disappointing backward step, but we’re encouraged that the company will continue to engage with companies on climate-related issues.

The Vanguard FTSE All-World ETF tracks an index that does not specifically integrate ESG considerations into its process. The ETF can therefore invest in shares issued by companies in any sector.

Cost

The ETF currently has an ongoing annual fund charge of 0.22%. The annual charge to hold ETFs in the HL ISA or SIPP is 0.45% (capped at £45 p.a. in the ISA and £200 in the SIPP). There are no charges from HL to hold ETFs within the HL Fund and Share Account or HL Junior ISA. Ensuring an index fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Since launch in May 2012, the ETF has done a good job of tracking the performance of the FTSE All-World Index. As expected from a tracker fund, it’s lagged the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as tight to the index as possible.

Over the last 12 months, the ETF has tracked the index closely and returned 17.71%*. Technology had the highest returns of any global sector during this time, gaining 39.65%. This was fuelled by recent advancements in Artificial Intelligence (AI). Financials, industrials and consumer discretionary also positively contributed to performance whereas consumer staples detracted from performance. Remember, past performance isn’t a guide to future returns.

India’s stock market rose by 40.90% over the year and is now the world’s fourth largest stock market. So far in 2024, India is the fastest-growing economy globally. Taiwan’s stock market performed strongly as well and recently reached an all-time high. This was led by Taiwan Semiconductor Manufacturing, the world’s largest chip manufacturer, which has seen huge growth due to the strong demand for chips essential for the development of AI.

The US market performed well but most of the performance was led by the companies known as the ‘Magnificent Seven’ - Google parent Alphabet, Amazon, Apple, Meta (previously Facebook), Microsoft, Nvidia and Tesla. These giant technology companies currently make up around 17% of the ETF so have a big impact on performance.

One area which was challenging over the 12 months was China, whose market fell by 11.30%. China’s economy hasn’t recovered as many had expected after re-opening from its Covid lockdown at the start of 2023. Retail spending has been below expectations and the country’s property sector is struggling due to rising house prices, a significant fall in demand and rising debts.

Given Vanguard’s size, experience and expertise running ETFs, this ETF should continue to track the FTSE All-World index well in future, though there are no guarantees. A glance at the five-year table below shows that the ETF has performed better in some years compared to others, which is in line with the performance of the underlying index that it aims to match.