August 17, 2014

ACWI vs. VT: The One-ETF Portfolio

Innovations in exchange-traded funds have made it so investors can easily (and cheaply) hold just one fund in their portfolio. Seriously - you can be well-diversified with just a single ETF in your account. Brokerage firms will often try to convince you that you must have your assets spread across as many funds and asset classes as possible. Why? Because the more holdings you have in your account, the more reluctant you might be more to move your money somewhere else. The idea of transferring too many securities over or liquidating everything and moving your cash may seem like too much of a headache.

Reduce your stress with a simplified, one-ETF portfolioBut the reality is that it's often unnecessary to have more than a small handful of investments to be broadly diversified. In fact, for the equity portion of your portfolio, you can realistically hold just a single ETF. If you're decades away from retirement and want to be 100% in equities, one holding might be all you need. If you're a bit closer to retirement, you might be able to get away with holding one equity ETF along with a Total Bond Market fund, like Vanguard's BND (and/or a Total International Bond ETF link Vanguard BNDX).

So what are these magical, all-in-one stock funds? The Vanguard Total World Stock ETF (VT) and the iShares MSCI ACWI ETF (ACWI). As of a few years ago, U.S. stocks made up around 46% of the world's total market cap. So if you like the idea of "buying the world" and having your assets split roughly 50/50 here at home and abroad, these two funds are for you.

So what's the difference between the two?

Comparing Vanguard VT to iShares ACWI: holdings, expense ratio, market cap, and trading volume

At first glance it appears that there are significant differences. Namely the number of stocks in each ETF. But like U.S. large cap indexes, the top few hundred holdings matter most and likely make up the vast majority of each fund. So that extra 5,000+ stocks in VT probably account for a very small amount of VT's total holdings. The average market cap is a somewhat meaningless number since it's an unweighted average. Based on weighted average data from, the weighted average market cap for VT is $76.69 billion and $89.08 billion for ACWI. Make no mistake, these are both squared mega cap or giant cap funds, for the most part. Both have healthy AUM and trading volumes and will likely be around for a long time to come. Expense ratios are very reasonable for both, but at 0.18%, the Vanguard fund is astoundingly low for an investment with such broad exposure. You'll typically only see U.S.-only large and mid cap ETFs with lower expenses.

Vanguard VT and iShares ACWI: country allocation comparison
In terms of geographic allocation, although each is based on a different index, the end result is a pretty similar composition. The top 16 countries in each fund are identical (India is also 1% of VT, making up a large portion of "other"). The exact percentages vary a bit, but overall there's no country that appears to be dramatically over or underexposed in one or the other.

If you follow the general rule-of-thumb that emerging markets should make up up to 10% of an investor's equity holdings, then both of these somewhat achieve that objective with roughly 7-7.5% in emerging market holdings - probably appropriate for most people.

So in theory both ETFs look similar, but how about real-world performance? Both were introduced in the first half of 2008 with ACWI coming first in March of that year and VT following close behind in June. Let's take a look at how closely they've tracked one another since then (total returns for both).

Historic ETF comparison chart between VT and ACWI
In slightly over 6 years (including the, the two have performed as one would expect. VT ended up 40.6% during that time vs. 35.7% for ACWI. The higher expense ratio probably made up for a small fraction of the under-performance (maybe up to 1%?). The rest likely explained by VT's additional mid cap exposure. This could work for or against it depending on mid cap performance in the future. Both ETFs are excellent. Ultimately I usually go with whatever has lower expenses.

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