V3AA – VWRA with ESG screening

Vanguard launched a new ESG ETF in March – the Vanguard ESG Global All Cap UCITS ETF, an accumulating, Ireland-domiciled ETF that’s listed on the London Stock Exchange similar to its sibling VWRA.

Frequent readers will know how much I love VWRA, I even dedicated a full post talking about it and why it is 80% of my DIY stock portfolio, the other 20% is in REITs because I also like passive income from collecting rent.

V3AA is basically VWRA with ESG characteristics. It takes a passive investment approach with an indexing strategy, and seeks to track the performance of the FTSE Global All Cap Choice Index.

The FTSE Global All Cap Choice Index is a market-capitalisation-weighted index composed of large, mid, and small-cap stocks of companies located in markets around the world – hence the name all-cap.

It is constructed from the FTSE Global All Cap Index which is then screened for certain environmental, social, and corporate governance criteria by the sponsor of the Index.

Here’s how the screening process works:

The FTSE Global All Cap Choice Index measures the performance of the FTSE Global All Cap Index after excluding companies involved in Vice Products (Adult Entertainment, Alcohol, Gambling, Tobacco), Non-Renewable Energy (Nuclear Power, Fossil Fuels), and Weapons (Chemical & Biological Weapons, Cluster Munitions, Anti-Personnel Landmines, Nuclear Weapons, Civilian Firearms, and Conventional Military Weapons).

FTSE Russell

Since the Vanguard ESG Global All Cap UCITS ETF tracks the FTSE Global All Cap Choice Index, investing in this ETF means you are investing in a diversified broad market portfolio from developed and developing countries, across small, mid and large sizes, with ESG screening criteria applied.

Now that gets me excited – because Vanguard has took my favourite ETF and made it even better by excluding countries that do not meet good governance standards or have poor social and environmental considerations.

Here are some quick facts about V3AA taken from the factsheet:

Some facts to highlight here:

  • It’s domiciled in London with a UCITS structure so it’s tax optimised for Singaporeans
  • It’s managed by Vanguard with annual total expense ratio (TER) of 0.24%
  • Dividends are accumulated instead of distributed

Comparing it to VWRA, the main differences are:

  • VWRA does not include small-cap stocks
  • VWRA is slightly cheaper with a slightly lower TER of 0.22%

What about the returns?

Since V3AA is a new ETF with limited historical data, let’s turn to the index to see how the index performed, as a fund tracking the index would have similar returns.

FTSE Global All Cap (in Grey) vs FTSE Global All Cap Choice (in Blue)

Looking at the chart above, it’s clear that the FTSE Global All Cap Choice Index has outperformed in recent times, given how ESG is forming a key investment consideration in many investors’ portfolio.

Even during periods of decline, it has declined at a similar rate as the FTSE Global All Cap Index, meaning that it actually exhibits better risk reward characteristics!

However, one thing to be mindful is the huge bid-ask spreads (~0.38%) on this ETF as it’s relatively new with low trading volumes. While liquidity shouldn’t be a cause for concern over the long-term, since ETF units can be also created and redeemed on the primary market in addition to being traded over the secondary market (i.e. exchange), frequent buys and sells of V3AA can eat into your returns.

With its low cost, globally diversified profile, all-cap inclusion, ESG screening, outperformance against its rival, V3AA is clearly the superior ETF of the two, and has gotten the Betterspider stamp of approval and earned itself a spot in my DIY portfolio.

  1. I am looking into this too. Inclusion of 1k+ small cap stocks makes it even more diversified. I dont mind the extra 0.02% for this.

    Having said that, any idea the current spread for VWRA? I reckon it is not too low either since it is also a new relatively new fund.

  2. Great option! I love all plus points u mentioned especially almost 5k stocks diversified across all caps. One lesser reason to go for robo 🙂

    Having said that i will keep investing in VWRA untill it reaches certain size and at the same time hopefully this fund will grow and have thw spread reducing (or even better the fee got reduced as well!)

    1. Yep, me too! Hopefully with time with adoption, the spread reduces and it becomes much cheaper to access this. I am also splitting funds between this and VWRA.

  3. I am also a VWRA fan and contemplating the shift to V3AA. Wanted to see your opinions too:

    1) Would the TER difference hurt the returns compared to VWRA?

    2) Would the addition of small-cap stocks (which are presumably more likely to be based in emerging countries) really boost the return? There’s a thread on how emerging markets (https://www.morningstar.com/articles/1032995/emerging-markets-equities-a-promise-half-fulfilled) benefits have been rather localized

    1. Hey! I don’t think you have to shift, you can just add new positions for V3AA.

      1) 0.02% difference in the TER is negligible, I think the extra returns based on historical data more than outweigh this
      2) Academic literature based on Fama-French actually demonstrate that small cap stocks will outperform in the long term https://www.investopedia.com/terms/f/famaandfrenchthreefactormodel.asp

      So overall I think V3AA is extremely attractive

  4. Thanks for yet another great insight. I’m curious, presumably the LSEETF is the one that’s SG tax optimised, but what’s the relationship with the IBIS2 and EBS versions?

    1. Hello CS, V3AA is listed across multiple exchanges in various currencies. IBIS2 is XETRA and EBS is SIX Swiss Exchange. Since they all track the same index, the returns would be the same. I’d recommend the LSE version (V3AA.LSE).

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