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Tuesday, 16 April 2019

War Of The Worlds

No aliens were harmed in the writing
of this blog post. 
Don't worry, I haven't gone soft on you by changing the blogs direction from FIRE and personal finance to movie reviews!

Just to clarify then, this article will be about checking which one of the four currently available worldwide ETFs is the best - and that's way more exciting than the Spielberg interpretation of the classic book, right?

Good, let's begin then...

Keeping It Simple

When it comes to investing, you can make it as simple or as complicated as you like.

While the investment industry wants you to believe that you need a fund that can manage the systemic macro risks of yield inversion via underweight bond exposure which can be carefully monitored to ensure inversely correlated equity returns from emerging markets offset by the yield out of REIT exposure to the Asia Pacific region, for the long term investor it can be as simple as picking a single well diversified ETF and then sitting back and waiting it out while you feel your pocket bulge (mind out the gutter people, the bulge is from your wallet! :)).

There is a lot to be said about picking a single globally diversified ETF for your long term investing – you get a huge amount of diversification across geographies, industries, and currencies, all in a single, easy to understand product. Just One Lap did a great job of discussing the merits of picking a single globally diversified ETF as part of this podcast episode titled One ETF To Rule Them All (hey, if I'm referencing War Of The Worlds in this article, they have every right to reference Lord of the Rings!)

By deciding on a single ETF for your investment, your decisions about which country, sector and companies to invest in, while keeping global economics, politics and currencies in mind and hoping that your investment manager's and financial adviser’s crystal balls ball functions correctly, becomes a simple choice of picking between 4 ETFs.

So if you want to keep your investing strategy dead simple, and, at the same time, allow yourself to beat more than 95% of investment professionals1 (be sure to brag about that fact the next time you are flipping wors with your mates) you can choose between these 4 Globally Diversified vanilla, market cap weighted ETFs:
  1. Ashburton Global 1200 Equity ETF
  2. Satrix MSCI World
  3. Stanlib MSCI World Index ETF
  4. Sygnia Itrix MSCI World
I have summarised the most notable attributes of each of these ETFs in the table below. (Information taken from latest MDDs (Feb 2019) and supplemented by information from the index providers’ documents where necessary. (Click for a larger image.)

Okay so that’s basically everything you need to know about each of the ETFs. So, now it comes down to deciding which of them is the best. Time for them to do battle!

Round 1 - TER

Keeping fees low is very important for any investment. It means you get to keep more of your money for yourself, and less of it goes to someone else. If you need any reminder of the impact that fees can have, check this article.

With regards to the fees the 4 different Worldwide ETFs charge, there is a very clear winner – the Satrix MSCI World is nice and cheap at 0.35%. Sygnia and Ashburton come in at close to double that price!

Round 2 - Diversification

In terms of a “pick one diversified ETF” strategy, the more diversification, the better. That includes diversification across companies, sectors and countries.

The Ashburton Global 1200 invests in 1200 different shares (wonder how on earth they came up with the name for the ETF...), while the others invest in over 1600 different companies. With each of the ETFs, you get access to huge amount of companies!

The number of companies each ETF invests in is important, but the weighting of each company must also be considered. The Ashburton has slightly less concentration, as can be seen by the Top 5 holdings (the largest two companies in the Ashburton 1200 are each under 2%, while the others are 2% or more). Not a lot in it, but something to consider.

When looking at the sector exposure they are all pretty much inline. The Ashburton 1200 does have less weighting at the top end and a more even spread, and is therefore slightly more diversified

Where the Ashburton Global 1200 is meant to stand out above the others is in it’s Geographical diversification – because it includes some emerging market exposure, while the others cover only Developed Markets.

The Ashburton Global 1200 covers 30 countries, the others cover 23. This may seem like a big difference but, on closer inspection, it doesn’t seem like there is much in it - the top 5 countries of the Ashburton fund make up 80.2% of the fund, while the other funds have around 83.6% of the fund in the top 5 countries. Pretty neck in neck.

I also did a quick matchbox calculation to check the amount of Emerging Market exposure in the Ashburton 1200, and was quite disappointed. By my numbers, it seems that the Ashburton 1200 has less than 3.5% in direct Emerging market exposure. So it is slightly more diversified, but not as much as you would think.

Having said all that, in terms of diversification, the Ashburton Global 1200 is the winner.

Round 3 - Dividends

This one is tricky to call, because it really depends on whether you are in the asset accumulation phase of your life (i.e. still saving for retirement) or in the asset drawdown phase of your life (i.e. living off your retirement savings).

If you are drawing down from your portfolio, you may enjoy the dividend income you get from the Ashburton Global 1200 and the Sygnia Itrix MSCI World. It means you do not need to sell as many units when you need to generate income, and so you score a little on brokerage costs.

On the other hand, if you are building your investments, you were likely just going to reinvest any dividends back into the ETF anyways. So if the fund can do this automatically on your behalf, it means you save on some admin, and you score on the brokerage you would have had to pay to manually reinvest.

So this one depends, and for that reason I score it a tie.

And The Winner Is...

So, in my view, choosing a winner comes comes down to the dirt cheap but (ever so) slightly less diversified Satrix Worldwide, and the more expensive but slightly better diversified Ashburton 1200.

The question to ask now becomes: Is the extra cost of the Ashburton Global 1200 worth the extra Emerging Market exposure?

As mentioned previously, I estimate the Emerging Market component of the Ashburton 1200 to be 3.5%, but let’s be generous and call it 5%. That means the ETF has 95% exposure to Developed Markets (the Satrix Worldwide has 100% Developed Market exposure).

I think it is also a reasonable assumption that the Developed Market component of the Satrix Worldwide will perform in line with the Developed Market exposure of the Ashburton 1200. So then, in order to justify the higher fee of the Ashburton 1200, we need the Emerging Market component of the Ashburton 1200 to perform better than the Developed Market component in order to make up for the performance which it loses to the Satrix World due to it’s higher fee. Make sense?

I ran the numbers and found that, in order for the Ashburton 1200 to justify it’s higher fee, it would need Emerging Markets to out-perform Developed Markets by 6.44% per year.

Now, make no mistake, there will be years where Emerging Markets will perform better than Developed Markets by 6.44% or more. There may even be multiple years where this happens. But, to expect Emerging Markets to outperform Developed markets by an average of 6.44% per year, for every year that you hold the ETF is a really tall order - and that would be just to break even.

So, in my mind, ignoring fees, the Ashburton 1200 is the better ETF due to to it’s extra diversification. However the amount you pay for this extra diversification is not justified.

For that reason, I declare the Satrix MSCI World ETF the winner (and continue to buy it).
(And then of course I also get the benefit of having my dividends automatically reinvested for me.)

Till next time, Stay Stealthy!
 - ~ - ~

1 The latest available SPIVA report from mid 2018 (check it out here) shows that over a 5 year period, 96.55% of South African Global Equity managers performed worse than the benchmark. In other words only 3.45% of South African Global Unit Trusts were able to do better than the benchmark. Yuck!

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