You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App
Join our mailing list to receive top business news every weekday morning.

War of the worlds

Worldwide ETFs pitted against each other.
The number of companies each ETF invests in is important, but the weighting of each company must also be considered. Picture: Shutterstock

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.

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 and financial advisor’s crystal balls ball functions correctly, becomes a simple choice of picking between four 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 four 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 is taken from the February 2019 MDD 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 – Total expense ratio

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 regard to the fees the four 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 1 200 invests in 1 200 different shares (wonder how on earth they came up with the name for the ETF …), while the others invest in over 1 600 different companies. With each of the ETFs, you get access to a 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 five holdings (the largest two companies in the Ashburton 1 200 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 in line. The Ashburton 1 200 does have less weighting at the top end and a more even spread, and is therefore slightly more diversified

Where the Ashburton Global 1 200 is meant to stand out above the others is in its geographical diversification – because it includes some emerging market exposure, while the others cover only developed markets.

The Ashburton Global 1 200 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 and neck.

I also did a quick matchbox calculation to check the amount of emerging market exposure in the Ashburton 1 200, and was quite disappointed. By my numbers, it seems that the Ashburton 1 200 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 1 200 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 1 200 and the Sygnia Itrix MSCI World. It means you do not have 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 down to the dirt cheap but (ever so) slightly less diversified Satrix Worldwide, and the more expensive but slightly better diversified Ashburton 1 200.

The question to ask now becomes: is the extra cost of the Ashburton Global 1 200 worth the extra emerging market exposure?

As mentioned previously, I estimate the emerging market component of the Ashburton 1 200 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 1 200. So then, in order to justify the higher fee of the Ashburton 1 200, we need the emerging market component of the Ashburton 1 200 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 its higher fee. Make sense?

I ran the numbers and found that, in order for the Ashburton 1 200 to justify its higher fee, it would need emerging markets to outperform 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 1 200 is the better ETF due to to its 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.

This article was republished with permission from Stealthy Wealth, the original can be found here.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

COMMENTS   18

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

I agree Satrix Msci World.

The (most common) purpose of investments is so that you (or heirs) can live off it some day. If your time horizon is infinite (as it may be in a global fund) an investment in perpetuity requires consideration for the tax you may pay down the line. This gives dividend paying ETFs an advantage over a dividend-accumulating ETFs, as you avoid the additional CGT that will be implicit in selling units when you need the money (the CGT exemption fo about R40 000 per year is not much….hardly enough to live on). If you opt for a dividend-accumulating ETF, you pay CGT…check it out here
https://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Capital-Gains-Tax-(CGT).aspx

So, while dividend reinvestment ETFs may appear attractive at the outset, be aware of the potential CGT of 18% (individuals) or 36% (trusts) that await you down the road. CGT (and all other additional tax) is avoided if you simply live off the dividends in a dividend distributing ETF, which, for reasons mentioned above, has been my strong preference.

Both types of ETFs incur dividend withholding tax, so no benefit to either ETF type in this respect.

As for the supposed costs you save with automatic reinvestment upfront with funds like the Satrix and Stanlib, you will simply incur these transactional when you have to sell one day!

But what about the key question of performance? If you look at the Forbes and Investopaedia websites and read around ETFs, the complexities of ETFs become apparent (script lending etc), and TER is not as simple as you think it to be. So, evaluating ETF performance in a particular sector gives you an idea of the real costs that are incurred!

Have a look at this website for objective outcomes
http://www.fundsdata.co.za/index.htm?load=1

http://www.fundsdata.co.za/scripts/home/QuickRank.aspx?c=Global–Equity–General&period=3yr&load=1

Over 3 years in the Globat Equity Category,
The Sygnia Itrix World comes 9th out of 65 Funds in SA (10.54 % per year)
The Satrix World comes 13th out of 65 funds (10.03% per year)
Ashburton not ranked as not around for long enough

Over 5 years:
Sygnia World comes 6th out of 45 funds (13.81% per year)
Satrix World comes 11th out of 45 funds (13.37% per year)

Over 1 year:
Sygnia is 22nd
Satrix is 20th
Ashburton is 37th

And then worry about bid-offer spreads. Personal experience is that the bid-offer spread is higher with the Satrix and the Ashburton ETFs than with Sygnia, but check it out for yourself!

Regarding your first para – this appears to be the case for the Satrix MSCI specifically, as the ETF holds a reinvesting ETF as its underlying investment.
With local reinvesting funds, the investor is deemed to have made a cash contribution into the fund, so on disposal you get to increase the base-cost, which off-sets any additional CGT.

Imho, the principal difference between dividend-reinvesting ETFs and dividend paying ETFs is that
1. with dividend-reinvesting ones you are potentially in for CGT one day when you sell anything more than small amounts per year (and maybe govt will hike these CGT rates in due course!)
2. with dividend-distributing ETFs you won’t have to worry about CGT if you live off dividends

Your point about raising the base cost applies to a dividend-distributing ETF too! if you reinvest the dividends in the latter, you raise the base cost too. So, no benefit to a dividend-accumulating fund in this respect that I can see.

However, focus on efficiency and outcomes of the ETF too! There are important differences between ETFs when it comes to tracking error, script lending etc.

Ask yourself a very simple question: How does an ETF (Sygnia World) with more than double the TER of another (Satrix World) markedly outperform the latter? See the performance figures above, before you even consider bid-offer spreads. The efficiency of the ETF matters

There is definitely more to this than meets the eye!

Don’t forget, the Sygnia World and Satrix World are both trying to track exactly the same index! Efficiencies of ETFs tracking the same index are apparent when differences emerge in performance. Focusing on TER alone is flawed, and that is the flaw of the conclusions of the above article, which simply focuses on TER and ignores the important issues of ETF efficiency and bid-offer spreads. Come to your own conclusions!

I don’t disagree with you. I just wanted to point out that there is no additional CGT on reinvesting ETFs – its not a benefit, but its not a disadvantage either.
The key benefit of reinvesting ETFs is that the investor who wants to reinvest distributions can do so with very little effort and at much lower cost (the asset manager pays a much lower execution fee than a retail investor would).
If an investor require an income stream from their investment, reinvesting ETFs are not the way to go!

When you read such a well balanced easy to understand conclusive article like this, it gives one faith in the Investment Institutions! Well done on a really interesting read,
I’ve been playing around with ETFs for a while but this article has encouraged me to take it a step futher.
Thank you

Thanks appreciate it!
I am not from any investment institution, I am an early retirement blogger – which I guess then proves your point about losing faith in the institutions 🙂

It is worth considering CIS vs ETF for global equit. Nedgroup did a good summary of cost considerations. CIS funds can be very effective. Sygnia, Satrix and Old Mutual have useful funds. The Old Mutual ESG Global leaders is my preferred fund for global equity. Their GEM ESG fund can be used to expand into Emerging markets to broaden offshore exposure. The main idea behind using a fund is to avoid brokerage and bid offer spread as additional charges on top of TIC.

Thanks for the research.

Investors should bear in mind these are 100% equity exposure products. They’re getting on board a bull market that has run for 10 years and already produced 200+% returns.

Historically, going balls deep in equities late in the cycle with high valuations tends to result in losses. Have some ETF exposure but carefully choose your weightings as a % of total portfolio and have a backup plan + sell rules for when the bull market ends.

AWOL:

Very true. These will give you good correlation to equity movements – but equity does not only go up…

We are at the tail of a record bull market in equities.

A small selection of defensive stocks might give a better return to 2024 than a big basket that includes many eye-wateringly expensive stocks? The banks & financial services excluding maybe insurance will get clobbered in a new crash and techs & healthcare are expensive. Anybody with big debt and little cash is risky. Berkshire?

I agree – anyone unable to ride out a market crash (due to time frame or personality) should not be 100% in equities.

But for a disciplined investor with a long time frame and still rand cost averaging in, a market crash would actually be most welcome 🙂

There is also the issue of liquidity that people fail to consider. I find that the bid offer spread on the Satrix world can sometimes be 2% plus and you really need to consider it before buying/selling.

Thanks Stealthy.

For a retired person the strategy described is presumably a 100% equity investment. So there needs to be a portion in income funds. You do not want to sell units during periods of market weakness.

If you are brave you could manage the split in way to take advantage of market dips.

Any thoughts on this?

Managing a split to take advantage of market sips sounds a lot like trying to time the market – and that often does not end very well.

A better strategy might be to target a specific asset allocation and then let that guide where you draw down from.

A point on diversification. Imagine you put the bulk your money in one ETF (or any other structure for that matter) and one day you decide to call in your money. Suddenly the call centre is not answering, the parent company has gone belly up and you discover terms like “payment gating”, “side pockets” and other creative terms that have not been invented yet. And you will be at a traffic light with a cardboard sign begging for food, despite the fact that there were 1200 companies underneath whatever structure is at the top.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

NEWSLETTERS WEB APP SHOP PORTFOLIO TOOL TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: