Unfortunately, there’s no single fund that contains everything like the Vanguard US fund VT, so you’ll have to use 2-3 funds to get worldwide exposure, or else use one fund that excludes some markets.
First, let’s separate the world into geographies and market cap.
| Developed markets (23 countries) – 90% of total worlds markets | |||||
| LC | (large caps or large-sized companies) | 70% | |||
| MC | (mid caps or mid-sized companies) | 15% | |||
| SC | (small caps or small-sized companies) | 15% | |||
| Emerging markets (23 countries) – 10% of total worlds markets | |||||
| Not broken down because it’s too small | |||||
Note – there is no single agreed-upon definition of large vs mid vs small caps. Each index provider has their own definition. We’re using the MSCI definition of 70/15/15 because most Australian index funds use MSCI.
Unfortunately, there are only two options to get worldwide indexing exposure through ETFs on the ASX.
Previously, Blackrock’s IWLD and SPDR’s WXOZ could have been used, but they have been converted to ESG and are no longer broad market index-tracking ETFs. It seems no company is willing to compete with Vanguard in the broad market indexing space as those who have tried end up without enough customers and assets under management for the fund to be profitable. As a result, competitors are moving to niche ETFs such as ESG or ETFs that track specific market segments. But these do not fit into making up a combined total world index.
Option 1 – VGS/VISM/VGE (ER: 0.23%)
| VGS | = | MSCI developed LC + MC | (ER: 0.18) | |||
| VISM | = | MSCI developed SC | (ER: 0.32) | |||
| VGE | = | Emerging markets | (ER: 0.48) |
Emerging markets (EM) is currently 10% by market weighting.
If you want simplicity, you can leave out small caps and go with VGS/VGE 90/10.
If you wanted the whole global markets, it would be VGS/VISM/VGE 76.5/13.5/10, where VGS/VISM are split into 85/15 (MSCI’s own index ratio).
The advantage with this option is that these funds are all Australian domiciled (avoiding US estate tax issues), and VGS/VISM holds the assets directly, avoiding potential tax drag, which we’ll talk about shortly. Although VGE is a wrapper for a US-domiciled fund VWO, so there is some tax-drag, although it is within just 10% of the portfolio.
The downside is that it is more expensive than the other options.
The overall expense ratio (ER) is (76.5% x 0.18) + (13.5% x 0.32) + (10% x 0.48) = 0.23 (rounded).
The 90/10 VGS/VGE option comes to 0.21.
* Note that VGS & VISM are world ex-Australia funds, created with the idea that an Australian would have separate Australian fund/s such as in the 3-fund-portfolio, but if you find no need to overweight your home country’s equities and these funds leave you missing Australian equities, I wouldn’t be concerned since the Australian market makes up just 2% of the world’s companies by market cap, so it won’t have a material difference leaving it out.
Option 2 – VTS/VEU (ER: 0.05%)
| VTS | = | US Total Market Index | (ER: 0.03) | |||
| VEU | = | All-World Ex-US Total Market Index | (ER: 0.07) |
These two funds also contain small caps, and VEU contains emerging markets, so together, they cover everything.
Currently, the global weighting is around 55/45 VTS/VEU.
These are ETF versions of the famed US funds VTSAX (VTI) and VFWAX (VEU) from the NYSE. They are simply cross-listed on the ASX (Australian stock exchange) for easier purchasing.
The upside is that they have an extremely low expense ratio. VTS is 0.03 and VEU 0.07, for a combined weighted cost of (55% x 0.03) + (45% x 0.07) = 0.05 (rounded).
As a consequence of being US-domiciled, you face potential US estate tax issues. Australian residents have a tax treaty up to 11.4M USD provided you send in the W8BEN form every 3 years. The problem is, firstly, if you get old and forget and die with the form being expired (and cost your heirs a fortune), or else if the US changes the law and you have to sell and realise gains to switch (or worse, you just don’t find out about it). You may consider these so unlikely that it is worth it for the lower ER. There is also some tax drag from VEU wiping out the effect of the lower cost. [1]
Option 3 – IVV/IVE/IEM (ER: 0.18%)
| IVV | = | US LC | (ER: 0.04) | |||
| IJH | = | US MC | (ER: 0.07) | |||
| IJR | = | US SC | (ER: 0.07) | |||
| IVE | = | Ex-US Developed Markets | (ER: 0.32) | |||
| IEM | = | Emerging markets | (ER: 0.68) |
IVV is only large caps, so we have to add US mid and small caps as separate funds.
IVE is Ex-US developed mid and large caps.
IEM is emerging markets, so the BlackRock equivalent of VGE.
The overall expense ratio of IVV/IJH/IJR/IVE/IEM is 0.18% (rounded)
This is about 0.05% cheaper than the first option but requires more funds to get the same exposure.
You could simplify by going only with IVV/IVE/IEM and the expense ratio is also 0.18% (rounded) but you have three funds instead of two. This is 0.03% cheaper than the VGS/VGE option, but again, requires an additional fund.
The advantage over VTS/VEU is that IVV is an Australian domiciled wrapper so you don’t need to worry about potential estate tax issues, but they come at a higher cost. The main use here is if you wanted US exposure in an Australian domiciled fund, but then you aren’t getting worldwide exposure.
Summary
Each option has its drawbacks.
In a nutshell, the options are:
- VGS/VISM/VGE – small caps optional
- Global weighting 75/15/10 (rounding to nearest 5%)
- Most expensive: 0.23 with VISM, 0.21 without.
- Australian domiciled, so no US estate tax issues.
- VGS/VISM Shares held directly, so no tax drag there, but tax drag in VGE.
- VTS/VEU
- Global weighting 55/45
- Very low ER: 0.05
- US-domiciled so potential US estate tax issues.
- Some tax drag with VEU, which cancels out most of the benefit of the lower expense ratio. [1]
- IVV/IJH/IJR/IVE/IEM
- ER is not far off the first option at 0.17% but with more funds.
- Australian domiciled, so no US estate tax issues.
- Tax drag in IVE cancels out most of the benefit of the expense ratio. [1]
[1] Tax drag
A post about tax drag of US-domiciled funds on bogleheads and whirlpool estimates the tax drag with each option above showing that once tax drag is factored in, the actual cost appears to be within a few basis points of each other.