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Replicating real global market capitalisations

Index tracking funds and ETFs
Windinthefens
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Replicating real global market capitalisations

#165708

Postby Windinthefens » September 11th, 2018, 5:36 pm

Over the last few years I've become a firm convert to index investing, and have tried to adopt the "rational portfolio" as recommended by Lars Kroijer (in his book Investing Demystified and his series of videos on YouTube).
I follow the logic and think it makes a lot of sense for most amateurs like me. He recommends effectively only having one equity ETF or index fund- a Total World index tracker. The idea is that the market has decided how much to invest in each country for you, and you are investing in direct proportion to that country's share of global market cap. I get that. My problem with this is that from what I can see, when I look at tables of market cap proportions, single global trackers seem pretty inaccurate- they seem to markedly under-represent emerging markets for instance.
Looking at various tables of global stock market cap percentages (sorry, I'm not able to post a link) I find the following:
China is nearly 10% of stock market cap but is only 3.3%of VWRL (Vanguard's All-World ETF)
Conversely the US varies from 36% on the stock market cap charts to 53% in VWRL.
These are big differences.
I'm currently getting around this by having two ETFs for equities, VEVE and EMIM, with 2/3 in VEVE. This is as near as I can get. I suspect it will make rebalancing more difficult in addition. I'd be interested to know why it is so far out and what other people have done about it, if anything. I'm aware there have been share class availability changes in China which may be some of it but that can't be all surely?

Thanks in advance
Windy

GeoffF100
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Re: Replicating real global market capitalisations

#165924

Postby GeoffF100 » September 12th, 2018, 4:22 pm

The weightings of these funds should be correct, but index funds do not necessarily invest in all the stocks in the markets concerned. Some are too illiquid, and others are not available to outsiders at all. Funds can also be picky about which markets they consider to be "emerging" and suitable for investment. You need to look at the definition of the index that is tracked. The weightings also vary over time, so you need to use up to date data for any comparison.

Windinthefens
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Re: Replicating real global market capitalisations

#166167

Postby Windinthefens » September 13th, 2018, 8:48 pm

Thanks Geoff,
I accept the points on illiquid areas and areas closed to outsiders. I think my frustration and surprise is that there is such a big difference. Having more than one equity ETF increases the temptation to alter the relative percentages in "developed" and "emerging". I've resisted so far, despite the sell-off in EM.
Windy

hiriskpaul
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Re: Replicating real global market capitalisations

#166270

Postby hiriskpaul » September 14th, 2018, 11:33 am

I would be curious to know where you are getting your numbers from. They are probably calculated a different way to MSCI and FTSE. One explanation could be that MSCI/FTSE indexes are "free-float adjusted", meaning large shareholdings tied up in corporate or government bodies are excluded, but the figures you are looking at include all the shares for a company, regardless of whether they are available to the market.

For the last 6 years I have been targeting fixed proportions for each geographical region, loosely based on the FTSE global weightings 6 years ago, but under weighting US. It has not done me any good!

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Re: Replicating real global market capitalisations

#166432

Postby JNC3 » September 14th, 2018, 7:09 pm

hiriskpaul wrote: For the last 6 years I have been targeting fixed proportions for each geographical region, loosely based on the FTSE global weightings 6 years ago, but under weighting US. It has not done me any good!


I am just enquiring what weights have you been targeting in each region and what type of investment vehicle have you used ? Different tracker funds seem to target different weights !

hiriskpaul
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Re: Replicating real global market capitalisations

#166445

Postby hiriskpaul » September 14th, 2018, 8:12 pm

JNC3 wrote:I am just enquiring what weights have you been targeting in each region and what type of investment vehicle have you used ? Different tracker funds seem to target different weights !


40% US, 20% Europe ex UK, 10% UK, 10% Japan, 10% EM, 7% Asia Pacific ex Japan, 3% Canada.

Mostly ETFS and UTs/OEICS, but still have some ITs outside tax shelters that I have not switched for tax reasons and a small position in Berkshire Hathaway that I like because it does not pay dividends.

The ETFS and funds are mostly cap weighted. The largest exceptions are Templeton Emerging Markets IT and an iShares US listed minimum volatility ETF (USMV), which seemed like a good idea when I bought it 6 years ago, but the cap weighted Vanguard Total US Stock market fund I bought at the same time (VTI) has beaten it.

The UK listed ETFS are a mixture between Vanguard and iShares. The tracker funds mixed between fidelity and HSBC. I used to hold some Blackrock as well but rationalised them away. Oh and I count a long running spread bet on FTSE 100 futures as part of the portfolio, along with a spread bet on an iShares S&P 500 ETF. The spread bets are there to mitigate tax on dividends and CGT. That may change as interest rates rise.

The portfolio is spread across our ISAs, SIPPS and various unsheltered broker accounts. All a bit complicated, but slowly simplifying as I work more into our ISAs each year.

In addition to all the above I have a mostly passive small cap portfolio consisting of some US listed ETFS, UK listed iShares ETFs and some ITs. This portfolio is weighted more closely to the World small cap Index.

Windinthefens
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Re: Replicating real global market capitalisations

#166515

Postby Windinthefens » September 15th, 2018, 9:01 am

hiriskpaul wrote:I would be curious to know where you are getting your numbers from. They are probably calculated a different way to MSCI and FTSE. One explanation could be that MSCI/FTSE indexes are "free-float adjusted", meaning large shareholdings tied up in corporate or government bodies are excluded, but the figures you are looking at include all the shares for a company, regardless of whether they are available to the market.

For the last 6 years I have been targeting fixed proportions for each geographical region, loosely based on the FTSE global weightings 6 years ago, but under weighting US. It has not done me any good!


I initially noticed that the figures on Kroijer's video (Investing Demystified) were different to MSCI figures. I then searched some online. Unfortunately I don't seem about to post links here but putting "world's top 10 countries by market cap" + "Schroders"into Google Images brings up a table from one of their presentations this year with 2018 data. It reckons US at $23tr, China at $6.6tr and the UK at just $3.0tr. (Total world cap $65tr).

Presumably the figures vary over time, but do seem well out from the All-World trackers, with US higher in trackers and China particularly being lower. It's relevant at present with the US being (possibly!) overvalued and emerging markets struggling.
Windy

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Re: Replicating real global market capitalisations

#166561

Postby Lootman » September 15th, 2018, 1:25 pm

hiriskpaul wrote:
JNC3 wrote:I am just enquiring what weights have you been targeting in each region and what type of investment vehicle have you used ? Different tracker funds seem to target different weights !

40% US, 20% Europe ex UK, 10% UK, 10% Japan, 10% EM, 7% Asia Pacific ex Japan, 3% Canada.

Mostly ETFS and UTs/OEICS, but still have some ITs outside tax shelters that I have not switched for tax reasons and a small position in Berkshire Hathaway that I like because it does not pay dividends.

The ETFS and funds are mostly cap weighted. The largest exceptions are Templeton Emerging Markets IT and an iShares US listed minimum volatility ETF (USMV), which seemed like a good idea when I bought it 6 years ago, but the cap weighted Vanguard Total US Stock market fund I bought at the same time (VTI) has beaten it.

The UK listed ETFS are a mixture between Vanguard and iShares. The tracker funds mixed between fidelity and HSBC. I used to hold some Blackrock as well but rationalised them away.

I like your allocation. How different is VTI from that? I'd probably just use VTI and then add some smaller positions to jig the allocations.

Incidentally iShares are part of Blackrock these days, so you have not quite rationalised them away! Barclays sold iShares to Blackrock during the financial crisis for a pretty penny.

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Re: Replicating real global market capitalisations

#167021

Postby xxd09 » September 17th, 2018, 9:03 pm

I think you are on the right lines
Fine tuning can be fun but really uses up valuable time you could deploy elsewhere
I use Vanguards Developed World ex UK plus a Vanguard UK FTSE as my Trackers
They are 30% of my total Portfolio split 26% and 4 % respectively
Emerging Markets ,Propery and Commodities are another play out with my ken so I do not bother with them
I rather rely on Vanguard re country Allocations -some countries ie China are big but more of a credit risk
Devoloped World definition is the key
PS Bonds -the rest of my Portfolio (70%) excluding some cash is in a Vanguard World Bond Index Fund hedged to the pound
Life is simple,cheap and so far(the last 15 years ) been rewarded by a growing Portfolio
Will this continue?
xxd09

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Re: Replicating real global market capitalisations

#167562

Postby Hariseldon58 » September 19th, 2018, 9:17 pm

@Windinthefens
Vanguard state regarding VWRL
The index measures the market performance of large- and mid-capitalisation stocks of companies located around the world.
Includes approximately 2,900 holdings in nearly 47 countries, including both developed and emerging markets.
Covers more than 90% of the global investable market capitalisation.

Not sure using EMIM to ‘top up’ VWRL is the best solution ( or necessary IMHO), it follows the MSCI index and they have a difference of opinion as to what constitutes Developed and Emerging.

The Lars Kroijer approach is attractive and has the benefit of working very well recently but.....it would have been a terrible approach in late 1989....I came across a Monevator link recently that demonstrated you would have done better with a cash account from then to now ! In that respect Hiriskpaul’s approach of using a fixed country allocation has merit, apart from underperforming of late...he will be right at some point though !

If you had declared a policy in 2009 of selecting the US market on the basis that the prior 10 years performance was terrible you would have done very well indeed.

I can see significant issues in using the All World approach , just because it has worked well recently does not mean it will be the best solution going forward.

Personally I have followed this approach in recent years and it has worked great but my own performance tables of the regions versus a selection of ITs I have held over the past 20 years showed that this did not work for longer than it did.

I am sure over an extended period it will not be a bad approach but you using a concentrated , effectively momentum approach.

I think you can add other assets to provide more diversification and i am not sure that this is the thread to go any further into my reservations to the one ETF portfolio.


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