‘Global’ or ‘world’ equity ETFs are an excellent way to gain broad diversification by tracking an index, which will often contain hundreds, if not a few thousand, individual shares based in all regions around the world and across a wide variety of sectors and companies.
For this fourth Insight looking at ETFs (please see links for Part 1, Part 2 and Part 3) we highlight some of the research investors should undertake in order to determine exactly where their money is being invested to ensure it fits with their underlying investment strategy and objectives.
ETF names can often be a bit of a word salad but it’s essential to understand what each word means and the impact it could have on the investment mix. To illustrate this we look at three ETFs containing ‘global’ or ‘world’ in their names, provided by three of the biggest players in the market.
All three ETFs invest in developed markets almost in their entirety, with only modest holdings in equities based in emerging markets. All of the main regions of the Americas, Europe and Asia are included. However, when we look into the detail we start to see the differences, with one fund having over 3,600 holdings, another almost 400 and the other just under 100.
If we start with the country and regional exposure we see two of the funds are focused strongly on North America, with around two-thirds of the holdings in companies in that region, while the other fund has just 40% of its holdings there.
Many investors will know that North America has been one of the most successful regions for investment opportunities for decades, and is home to some of the largest companies the world has ever seen in sectors that continue to shape our everyday lives. So, a larger exposure could potentially represent a better investment opportunity.
However, when looking at the portfolio holdings in that region, there are some significant differences in the investments, representing quite different sectoral allocations and underlying companies. One list of top 10 holdings comprises mostly companies which are never far from the news headlines, focused almost entirely on one sector, technology, while for one of the others I suspect many investors would struggle to guess which industries and sectors they were in.
Further investigation of the investment regions show two funds like other regions around the world a lot less than North America, with the next largest regional holding being around a tenth of the size, while the other maintains more substantial allocations to other regions.
Moving away from the regional breakdown and the breakdown of investment sectors also reveals some wider differences. While technology makes up around a quarter of two of the ETFs, albeit with quite different underlying holdings, the other allocates a little over 2% to this sector. Moreover, financials and utilities are included in all three funds, but while one fund allocates over half of the portfolio to these sectors, the other two’s holdings represent less than one-fifth.
The above paragraphs are not meant to be criticisms of how ‘global’ or ‘world’ the ETFs investment strategy is and some investors may be indifferent to the regions or companies within the funds, so long as they continue to provide the desired level of returns.
However, many investors may have greater convictions around their allocations and there may be regions or sectors that one might want to reduce (or increase) exposure to. Therefore we recommend investors should always ensure they do an appropriate level of due diligence to understand what and where they are investing in, and how some of the other, sometimes subtle, words in the names of the funds (in this case ‘value’ and dividend’) can have large implications on the diversity of regions, sectors, and companies within the funds.
Any readers wishing to get in touch to discuss how our investment advice, including investing in ETFs, could help them please do contact us at info@arlingclose.com.
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