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Vanguard FTSE All-World ETF: June 2022 update

In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, ESG Integration, cost and performance of the Vanguard FTSE All-World Exchange Traded Fund (ETF).

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • 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.

Find out more about ETFs

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.

A tracker 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 biggest index funds in the world. Given its size, it has a large investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

Vanguard ETFs are run by a large, global team of 80. 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 fund. As a collective team, Vanguard has run this ETF for 10 years.

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 could 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 21.9% in the technology sector, driven by the 59.2% 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 14.5% and 13.9% 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 £6.2 trillion of assets globally as of March 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 equity 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 fund 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 ESG (Environment, Social and Governance) 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 35 people, carries out most of the firm’s voting and engagement activity. Its 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.

As an example, in the US, the team has engaged with Tesla at least annually over the past five years. Last year Vanguard supported a proposal seeking additional reporting on its diversity and inclusion efforts. They also engaged with the company on diversity, equity and inclusion in the workforce, alongside the board’s oversight of human rights-related risks.

As the Vanguard FTSE All-World ETF tracks an index of companies, it does not specifically integrate ESG considerations into its investment process, and the fund therefore has the flexibility to invest in companies deemed to be sin stocks, such as weapons and alcohol producers.

Cost

The fund currently has an ongoing annual fund charge of 0.22%. This is one of the lowest cost ETFs for tracking the FTSE All-World index on the HL platform. 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 in the ISA and £200 in the SIPP). Ensuring a passive fund has a low charge is an important part of tracking the underlying index closely.

As ETFs trade like shares, buys and sells are subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

The Vanguard FTSE All-World ETF has tracked the FTSE All-World index well since launch. Over this time, the fund’s returned 165.92%* versus the benchmark’s 179.95%. 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 information technology, these companies would currently have the biggest impact on the ETF’s performance, though the makeup of any index can change over time.

Over the last year, the FTSE All-World index returned 5.6% to the end of May 2022. Oil & gas companies were the best performing during the year with the sector growing over 70%. This is partly down to the ongoing effects of the Ukraine crisis which has led to a surge in global oil & gas prices. However this sector only makes up around 5% of the total index.

Other sectors like technology, which has returned just under 5% over the year, 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 rises, the value of these future cash flows decreases.

So far this 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.

More broadly, Russia’s invasion of Ukraine and China’s attempt to maintain a zero-covid policy have extended supply chain issues. This continues to drive higher inflation and companies will likely endure higher wage costs, as workers demand increased pay to support higher prices. This may slow profits for companies.

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.

Annual percentage growth

May 17 – May 18 May 18 – May 19 May 19 – May 20 May 20 – May 21 May 21 – May 22
Vanguard FTSE All-World UCITS ETF 8.40% 3.99% 7.48% 23.32% 5.11%
FTSE All World 8.97% 4.58% 8.01% 23.91% 5.60%

Past performance is not a guide to the future. Source: *Lipper IM 31/05/2022. Figures to May 2020 are the income units of the fund with income reinvested and May 2020 to May 2022 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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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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