Global trackers and the Magnificent Seven - diversification?
Discussion
Many investors feel they have a well diversified international portfolio when they buy a global tracking fund
Tracking may be low cost but it doesn't look much like diversification. Is there a better way?
- USA accounts for 60% of global stock markets by value.
- Seven major technology companies account for around 30% of S&P 500 and 50% of Nasdaq 100.
- Apple, Microsoft, Amazon, Nvidia (chips), Meta (Facebook), Tesla and Alphabet (Google).
Tracking may be low cost but it doesn't look much like diversification. Is there a better way?
Developed Markets ex. US ETF would cover this, no?
https://advisors.vanguard.com/investments/products...
https://advisors.vanguard.com/investments/products...
Panamax said:
Many investors feel they have a well diversified international portfolio when they buy a global tracking fund
Tracking may be low cost but it doesn't look much like diversification. Is there a better way?
Use a fund with less exposure to the US market, in the end you have about 30% of your money in the largest companies in the world, depends on how much of a risk you see in that, but other indexes, and funds with less US exposure are available.- USA accounts for 60% of global stock markets by value.
- Seven major technology companies account for around 30% of S&P 500 and 50% of Nasdaq 100.
- Apple, Microsoft, Amazon, Nvidia (chips), Meta (Facebook), Tesla and Alphabet (Google).
Tracking may be low cost but it doesn't look much like diversification. Is there a better way?
Panamax said:
So an investor in a global tracking fund has around a quarter of their money invested in just seven companies.
Tracking may be low cost but it doesn't look much like diversification. Is there a better way?
depends on the reasoning for diversification....exposure to a market, 'less risk', easy management etc; personally i'd rather have the 7 companies that are producing stellar growth/returns and not the other 490odd.Tracking may be low cost but it doesn't look much like diversification. Is there a better way?
Diversification ( IMO) makes more sense between sectors - if one is really concerned about a small basket; but as AI and its ilk are likely to be the buzzwords/growth of the next few years, then those 7 should do just fine - tempered with a few others to even out the dips.
as for 'global' - same really, china? no thanks, uk same......if the US has a bad time, think it's fair to say that other markets are going to mirror to some extent.
Panamax said:
So an investor in a global tracking fund has around a quarter of their money invested in just seven companies.
That's incorrect. The top 10 holdings in the MSCI ACWI accounts for 18% - I don't think that feels overly concentrated, particularly when a lot of active funds have top 10 holdings that can be as high as 50% or 60% greengreenwood7 said:
.if the US has a bad time, think it's fair to say that other markets are going to mirror to some extent.
That's not quite true either, depending when you started investing the US has only just caught up;
Now obviously a chart can tell whatever story you want depending on the start date/time period being measured - a valid criticism of the post I've just made!
But I don't think it has to be the case that the US going sideways for 10 years means every other market has to as well...
Panamax said:
- USA accounts for 60% of global stock markets by value.
As for "is there a better way"? Who knows, but Vanguard's latest 10-yr forward model predicts Developed markets ex-US to be a better performer than US. The US is currently expensive, and maybe for good reason, but you have to remember there's a large element of FOMO driving the price of (certain) stocks further.
The search for a "third way" is what gave rise to the notion of "smart beta" and in turn factor investing - essentially, constructing rules-based indices weighted by fundamental and technical criteria (e.g. value, growth, quality, volatility, or indeed nothing at all) besides market cap. The theory being that you get better diversification leading to superior risk-adjusted returns vs cap-weighted indices, but with greater transparency and at lower cost than active management.
Over the last couple of decades a large swathe of the investment profession has been built around the idea, with lots of demand from institutional allocators and many banks, asset managers and index providers keen to facilitate it. Latterly, thanks to product and technological innovation, retail investors have been able to join the party reasonably cheaply with factor ETFs. As to whether it actually does what it says on the tin...the jury's still out, with a lot of ongoing debate within industry and academia. I certainly have opinions, but could quite easily end up writing an essay if I got started
Over the last couple of decades a large swathe of the investment profession has been built around the idea, with lots of demand from institutional allocators and many banks, asset managers and index providers keen to facilitate it. Latterly, thanks to product and technological innovation, retail investors have been able to join the party reasonably cheaply with factor ETFs. As to whether it actually does what it says on the tin...the jury's still out, with a lot of ongoing debate within industry and academia. I certainly have opinions, but could quite easily end up writing an essay if I got started
FTSE All World = 61%
MSCI ACWI = 63%
MSCI World = 70.1%
MSCI World Ex UK = 73%
I really don't see the appeal of buying a global tracker that excludes large parts of the world. The whole point of buying the whole world is to own the whole world. Emerging Markets have been a drag on performance for the last few years, but a big contributor to performance at many times in the past. As such why would a long term investor want to exclude them (other than "because the fund without them has done better for the last 5 years" which is a silly way to make investment decisions)?
Since 1987 the MSCI ACWI (i.e. including emerging markets) has returned 8.10% vs 8.29% from the World (i.e. excluding EM). So a performance difference of 0.19%.
Yet over the last 3 years the MSCI ACWi has returned 6.61 vs 8.58. Performance difference of almost 2%.
If mean reversion exists, a period of US stock market doing not quite so well and Emerging Markets having a moment in the sun may pan out at some point in future, by not buying the ACWI it's a bet against that happening.
ACWI is more diverse, less concentrated, lower PE ratio....it's a no brainer for me.
- return figures based on USD, GBP will be different
simon800 said:
That's not quite true either, depending when you started investing the US has only just caught up;
.
i was referring to the markets not specific trackers/funds - the S&p unless i'm mistaken has done 2x the ftse for example over the past 10 years, maybe the DAX is a closer performer? Main point i was drilling at is that it seems that many like the idea of diversification without considering what the goal is, or what that truly means..
greengreenwood7 said:
Main point I was drilling at is that it seems that many like the idea of diversification without considering what the goal is, or what that truly means.
Your point is well made. Some people get bogged down in points of detail without getting a grasp of the overall concept.I'll bet cash money there's a shed-load of people out there in global trackers who think they've bought one thing but actually own something completely different. Namely, a portfolio heavily slanted towards a few companies in one part of the market.
Most particularly, to be buying the Magnificent Seven right now I think you've got to have a belief in further future growth that looks hard to deliver. And if it does deliver will just make things even more concentrated.
As it happens, I trimmed holdings in those companies back in 2021 when the market last peaked. Haven't regretted it yet and those particular investments have now grown back to the size they were before they were trimmed. Am I better diversified? Yes. Has it held back my overall returns in the last three years? Yes, a little. Am I bothered? No.
greengreenwood7 said:
i was referring to the markets not specific trackers/funds - the S&p unless i'm mistaken has done 2x the ftse for example over the past 10 years, maybe the DAX is a closer performer? Main point i was drilling at is that it seems that many like the idea of diversification without considering what the goal is, or what that truly means.
That's definitely true, I thought your point was that if the US tanks everything else will at the same rate - sorry if I misunderstood. "Most particularly, to be buying the Magnificent Seven right now I think you've got to have a belief in further future growth that looks hard to deliver."
for sure as and when the market tops out they'll be hit ( the Mag 7)...and there have been umpteen false narratives that haven't played out, but i think AI isn't one of those and is here for the foreseeable. On that basis, as toppy as they may seem i suspect that they'll continue to do quite nicely.
With all these things it's a question of deciding whether to be on the train, and when to get off - goals/planning - and if those 2 are executed, then whatever happens - 'happens'. But as you said (panamax), i suspect there's a huge majority that don't know what they're really invested in, and have ticked a mental box - given themselves a pat on the back for buying a headline product and gotten on with their lives.
i know i did when i first set up a sipp, with the 'advice' of a pro - i trusted the names, trusted the advice and ultimately regreted not being more informed ( when i saw the performance).
for sure as and when the market tops out they'll be hit ( the Mag 7)...and there have been umpteen false narratives that haven't played out, but i think AI isn't one of those and is here for the foreseeable. On that basis, as toppy as they may seem i suspect that they'll continue to do quite nicely.
With all these things it's a question of deciding whether to be on the train, and when to get off - goals/planning - and if those 2 are executed, then whatever happens - 'happens'. But as you said (panamax), i suspect there's a huge majority that don't know what they're really invested in, and have ticked a mental box - given themselves a pat on the back for buying a headline product and gotten on with their lives.
i know i did when i first set up a sipp, with the 'advice' of a pro - i trusted the names, trusted the advice and ultimately regreted not being more informed ( when i saw the performance).
Is anyone aware if there are any 'Ex-USA' equity ETF's available in the UK?
There doesn't seem to be many however conversely not keen on putting together specific % allocations for each region.....hence use passive ETF's and funds...the seemingly significant US allocation is slightly concerning but I have no idea what will happen....knowing my luck I would reduce my US Equities exposure and the markets would just keep powering up......
There doesn't seem to be many however conversely not keen on putting together specific % allocations for each region.....hence use passive ETF's and funds...the seemingly significant US allocation is slightly concerning but I have no idea what will happen....knowing my luck I would reduce my US Equities exposure and the markets would just keep powering up......
Magnificent 7?
Haven't we come down to the magnificent 6 since Tesla's price correction over tha last few moinths?
On the basis that to be in the "Mag7" the company needs a market cap of $500 billion, ther are only 6 possible companies, who could join the club.
One being BRK and considering despite reducing their AAPL holding in Q4 2023, they still hold a 45% allocation to their portfolio.
That doesn't exactly help with diversification?
Haven't we come down to the magnificent 6 since Tesla's price correction over tha last few moinths?
On the basis that to be in the "Mag7" the company needs a market cap of $500 billion, ther are only 6 possible companies, who could join the club.
One being BRK and considering despite reducing their AAPL holding in Q4 2023, they still hold a 45% allocation to their portfolio.
That doesn't exactly help with diversification?
VR99 said:
Is anyone aware if there are any 'Ex-USA' equity ETF's available in the UK?
Not in the UK, to the best of my knowledge. Most Ex US products are targeted at the US market.There are following options;
An active global fund that is ex US - https://www.hl.co.uk/funds/fund-discounts,-prices-... - FUND OBJECTIVE To produce a total return in excess of the MSCI All Country World Index (ex U.S.) (?Index?) over any period of five years after all costs and charges have been deducted.
Active funds with significant underweight to the US
Multi factor ETF's, which have an underweight US and/or an overweight to value stocks
Regional ETFs which could be used to reduce the US but sounds like that's not what you want
On the passive side, you could buy Vanguard Life Strategy 100 or Blackrock Consensus 100 which both have less than 50% US.
Or finally you could buy AJ Bell's multi asset range, which carries a massive underweight US. Their AJ Bell Adventurous offering has 23% US, PE ratio of 13 and has returned 8.35% p/annum over the last 5 years. If you wanted to leave the decisions to the pros that's perhaps one to consider.
simon800 said:
VR99 said:
Is anyone aware if there are any 'Ex-USA' equity ETF's available in the UK?
Not in the UK, to the best of my knowledge. Most Ex US products are targeted at the US market.Less concerned with my SIPP or pension investments as 15+ years to ride out the peaks and troughs but considering whether to take the edge off my S&SISA (currently SWLD is my 'core' Equities ETF and have a iShares EM etf alongside it).
EDIT:Limited to ETF's due to the platforms favourable charging structure for ETF's Vs OEIC's
Edited by VR99 on Monday 19th February 18:18
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