“Just buy a global ETF” is a piece of advice that investors hear all the time. But the definition of “global” varies broadly between the best-known “global ETFs.” This article gives you an overview of the most important differences, and tells you how to invest in ETFs with low investment costs.
The interest rates of savings accounts are not high enough to balance out inflation. Those who, after due contemplation, choose to invest part of their savings, are faced with another challenging question: What is the best way to invest?
Many sources will tell you to “just invest in a global ETF.” That may sound easy, but what exactly does it mean? Are there differences between the many global ETFs on the market? How can I invest in ETFs without high fees?
Why a global ETF?
An ETF (exchange-traded fund) is an investment fund whose shares are traded on a stock exchange. Typically, ETFs replicate an index – automatically, transparently, and cheaply. A global stock ETF bundles shares in thousands of companies across dozens of countries and industry sectors into a single investment. Rather than betting all your money on one horse, you spread out the risk over numerous companies around the world (diversification) – without having to buy shares in each company individually.
The high diversification means global ETFs are particularly well-suited for use as the core of a long-term investment portfolio. But the deciding question is: How “global” is a global ETF, really?
MSCI World vs. FTSE All-World: The two classic global indexes
Most global ETFs replicate one of two indexes: The MSCI World or the FTSE All-World. Both sound like they cover the whole world, but a closer look shows that is not the case.
The index includes large and mid-sized companies (large-cap and mid-cap stocks) in 23 developed countries. Developing countries like China, India, or Taiwan are not represented. The index also does not include smaller companies (small-cap stocks). With around 1250 companies included, the MSCI World tracks around 85 percent of the total value of the world’s stock market. Because the US has the biggest stock market, US stocks make up around 70 percent of this index. The tech sector is also heavily represented, making up around one-third of the index. Just the 10 stocks with the highest market capitalization – names like Nvidia, Apple, and Microsoft – make up around 28 percent.
The FTSE All-World goes a step further to also include companies in developing countries like Taiwan, China, and India. Here too, small cap stocks are not included in the index. Tracking more than 4000 different stocks, the FTSE All-World index is much more widely diversified than the MSCI World, covering around 90 to 95 percent of the global stock market, by market capitalization. The proportion made up of US stocks is lower than that of the MSCI World, at around 60 percent.
Note about currency exchange rate risk: The values of both indexes are heavily dependent on stocks listed in foreign currencies. The US dollar is particularly prominent, as the US stock market is very prominent in the indexes. If, for example, the US dollar loses value against the Swiss franc, the real return you earn in Swiss francs will be lower than the quoted US dollar performance. That is true even if the ETF you use to replicate the index is traded in Swiss francs.
Which index should I use?
Both of the indexes are suitable, in principle. If you want to spread out your investment as broadly as possible – including in developing countries – then the FTSE All-World is the better choice. If you want to focus on established markets, then the MSCI World lets you do that.
In recent years, the MSCI World performed slightly better, as developing countries grew slower than US tech companies, for example. But past performance is not a clear indicator of future performance. It is not unimaginable that the prominence of US stocks and the concentration of capital in a handful of tech stocks could become a disadvantage in the future. Ultimately, which index to use comes down to your preferences, and which markets you want to invest in.
Is a global stock ETF a good basis for investing?
For many investors, a global ETF is a good investment basis because it already covers a large part of the world’s stock market. As long as you are aware of the shortcomings explained above, you can always add targeted investments to balance out the inequalities at a later point in time.
For example, you can also buy shares in ETFs that specifically invest in developing countries (emerging markets) or small companies (small caps) separately. You can also invest in specific countries or regions like Switzerland or Europe to balance out the strong US focus and currency exchange risks.
Important: Before adding other investments to your portfolio, make sure to check for unwanted overlaps with your global ETF or with each other.
Which ETF should I use for my global portfolio?
After deciding which index to use, the next step is to decide on an ETF that replicates that index. Often, there are many different ETFs that track the same index. These are the things you should look at when making your choice:
The brokerage fees you pay when you buy shares in an ETF are at least as important as the TER fees. If you regularly invest small amounts, you will have to pay a brokerage fee every time you invest. These fees can cut a big chunk out of your returns. That is why choosing the right stockbroker is very important.
Buy global ETF shares cheaply with neon and Xtrackers
With its free savings plans, neon helps you minimize investment costs. The Swiss finance app enables you to invest automatically every month. There are no brokerage fees for select ETFs, and neon does not charge any custody fees for holding your ETF shares.
Funds that you can invest in without brokerage fees also include certain global ETFs, such as those from Xtrackers by Deutsche Asset Management. With around 455 billion euros worth of assets under management, Xtrackers is one of Europe’s biggest ETF managers. Its ETFs that replicate the broad “Core” indexes have some of the lowest TER fees on the market.
Examples: If you were to invest 200 francs per month for 10 years, your total investment would be 24,000 francs. The comparison shows how much of a difference brokerage fees can make:
This is how to turn the theory into a simple routine: Choose an index and choose how much you want to invest every month – the savings plan does the rest. In addition to the fees shown in the table above, you also pay stamp taxes and TER fees.
Conclusion: Starting early with a solid basis is better than waiting
MSCI World or FTSE All-World? The differences are real, but there is another question that is much more important for successful investing: When will you start? Waiting for the perfect portfolio can cost you precious time during which your money could be working for you. It is better to start with a solid, widely-diversified basis and then add targeted portfolio components later on, if necessary.
Set up a savings plan in the neon app now
Disclaimer: This article is provided for informative purposes only, and should not be considered as investment advice. Investing in securities comes with a risk of loss, including the possibility of losing all of your investment capital. Historical price changes are not a reliable indicator of future performance.
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