Investing in simple and effective portfolios means you spend more time doing the things you love, that’s why I like VWRA (Vanguard FTSE All-World UCITS ETF).
VWRA is domiciled in Ireland and invests in a globally diversified portfolio of 3,900 holdings in 50 countries, covering more than 95% of the investable market population.
If you want a passive, set and forget investment, it’s hard to go wrong with this – but don’t expect any market-beating returns.
However, there are some drawbacks about investing in VWRA. It’s listed on the London Stock Exchange, which some brokers might not support. There are also no easy ways to dollar cost average into the fund, unlike VT which can be set up as a regular savings plan on FSM One.
VT is usually considered as one alternative to VWRA to get broad market exposure that’s globally diversified.
VT and why it might not be so good either
VT (Vanguard Total World Stock Index Fund ETF) is the US-domiciled fund that tracks the FTSE Global All Cap Index, has a smaller total expense ratio of just 0.08% and more diversified (8700+ holdings as it also includes small cap stocks).
It was also launched much earlier in 2008 so it has more than 12 years of operating history.
VT is also much more liquid on exchanges with an average daily trading volume of US$12M and lower spreads of 0.01%.
Despite its apparent strengths, VT is not suitable for Singaporeans, with the biggest drawback being the high dividend withholding tax rate (30%) which will levy a huge performance cost when non-US residents own it.
There’s also the concern of US estate taxes if you own more than US$60K of US assets.
Hence, while VT is easier to trade and own, it’s not suitable as a long-term core stock holding for Singaporeans.
VWRD if you like receiving dividends
VWRD is the distributing version of the fund that tracks the FTSE All World Index, which means the fund distributes dividends it receives from companies that it owns.
The underlying holdings and the proportion that they are held in are the same as VWRA.
Some people (for example, retirees or those who like seeing cash inflows) might like receiving dividends (in USD) from their investments, and if you’re such a person, then VWRD might be for you.
The problem that I see with dividends is that reinvesting them – especially since dividends are distributed quarterly – can be a huge pain. For example, a $10,000 portfolio of VWRD that pays a 2% annual dividend means you are getting about $50 quarterly dividends – you cannot even buy one share of VWRD with that amount.
Reinvesting the dividends automatically might be a better option since you save transaction/brokerage fees and you get to put your money to work right away.
VWRA reinvests dividends automatically at the fund level
VWRA is the accumulating version of the fund that tracks the FTSE All World Index.
Unlike US fund legislations which mandate US-domiciled funds to distribute at least 90% of their dividends, non-US domiciled funds do not, hence there’s an option for Vanguard to create a different share class of the same fund which automatically reinvests the dividends it receives.
Instead of paying a dividend, it uses the money to buy more fund assets internally within the ETF. Note that the net asset value (NAV) of the fund drops by the dividend per share in the case of a distributing ETF when it pays a dividend.
Overall, the long-term returns of both distributing or accumulating ETFs should be the same, assuming that there are no transaction costs. The net increase in NAV from reinvesting the dividends from the fund should equal to the decrease in NAV from distributing dividends plus the dividend per share received.
However, because transaction costs exist in the real world, and you cannot own fractional shares, VWRA might be more cost-efficient with reduced cash drag.
Keeping in mind the investor’s preferences (e.g. long-term holding or trading; dividends or reinvested returns), all 3 ETFs provide similar exposure and long-term returns to a globally diversified portfolio of stocks.
However, because there are finer nuances between them and potential tax complications, it might not be a straightforward decision to choose one over another.
For me, VWRA serves as a really solid core holding for the long-term since it helps me avoid US tax traps and I don’t have to constantly worry about the timing, frequency and distribution of dividends.