Vanguard FTSE All-World ETF: May 2023 update

• Vanguard is a pioneer in index investing, and created the first retail tracker fund
• This ETF offers exposure to a broad range of countries and sectors
• The fund’s low charges should help it track the FTSE All-World index closely

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. The index provides exposure to 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 index fund 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.

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 closely as possible.

Process

The Vanguard FTSE All-World ETF tracks the performance of a broad range of companies as measured by the FTSE All-World Index. The ETF tracks the benchmark by investing in most of the underlying companies, and in line with each company’s index weight. This is known as partial replication and can help the fund track the index closely. Smaller companies can sometimes be difficult or more costly to trade which can negatively impact performance. So the team exclude these companies from the fund to help run it more efficiently.

Reducing costs is a key part of keeping the tracking difference between the fund and the benchmark to a minimum. In any index tracker fund, factors like taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance.

The ETF currently has a large weighting of 20.9% in the technology sector, which is driven by 61.7% exposure to the US where there are household names like Apple and Microsoft. After the technology sector, the financial and consumer discretionary sectors make up 15.4% and 13.8% of the ETF respectively.

Vanguard will also lend some of the investments in the ETF to other providers in exchange for a fee, which can reduce the costs for investors, though this adds risk. Vanguard will only lend securities to a limited number of approved dealers. They also indemnify the fund against any loss from this process, meaning there should be no negative impact on investors.

Culture

Vanguard is currently the second largest asset manager in the world and runs just over $7.2trn of assets globally as of December 2022. 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 stocks which may beat them.

The team running this ETF works closely with other fixed income 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, which consists of over 60 people, 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 also produces frequent insights on their engagement activity at both a corporate and governmental level.

In December 2022, Vanguard left the Net Zero Asset Management initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. 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 company shares issued by companies in any sector.

Cost

The ETF currently has an ongoing annual fund charge of 0.22%. There are no charges from HL to hold ETFs within the HL Fund and Share Account. 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). Ensuring an ETF 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 within any Hargreaves Lansdown account.

LEARN MORE ABOUT THE DIFFERENCE BETWEEN ETFS AND MUTUAL FUNDS

Performance

The Vanguard FTSE All-World ETF has tracked the FTSE All-World index well since launch. Over this time, the fund’s returned 232.49% versus the benchmark’s 251.42%*. As expected from a tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance as close to the index as possible. Past performance isn’t a guide to the future.

As the FTSE All-World index currently has large exposures to sectors like technology, these companies currently have the biggest impact on the ETF’s performance, though the makeup of any index can change over time.

Technology has returned -3.03% over the year. These shares have been held back by rising inflation and interest rate rises. Technology companies, often known as ‘growth’ stocks, are expected to have higher earnings in future. But when inflation and interest rates rise, the value of these future cash flows in today’s terms decreases.

So far over the last year, ‘value’ companies have performed better – these are businesses that have often been shunned by investors and whose shares may look ‘cheap’ compared with the companies’ prospects.

Given Vanguard’s size, experience and expertise running ETFs, the fund could continue to track the FTSE All-World index well in future, though there are no guarantees on how it will perform. A glance at the five-year table below shows that in some years the fund has tracked its benchmark closer than others. The fund’s value will rise and fall over time, so investors could get back less than they invest.

Past performance is not a guide to the future. Source: *Lipper IM 31/03/2023. Figures to March 2020 are the income units of the fund with income reinvested and March 2020 to March 2023 are the accumulation units. This is due to when the accumulation units were launched.

FIND OUT MORE ABOUT VANGUARD FTSE ALL-WORLD ETF INCLUDING CHARGES

VIEW VANGUARD FTSE ALL-WORLD ETF KEY INFORMATION DOCUMENT

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