Fund Battle: Vanguard global ETF versus BlackRock global ETF

Passive funds that track a large, diversified basket of global shares are an extremely popular way of simply “owning the world”, without having to pick an active fund manager or choose a preferred region.

Two exchange-traded funds (ETFs) that regularly feature in our monthly most-bought ETFs’ list are the iShares Core MSCI World Ucits ETF (SWDA) and the Vanguard FTSE All-World UCITS ETF (VWRP). Both ETFs reinvest dividends and are traded in pounds. 

• Invest with ii: Buy Global Funds | Top Investment Funds | Open a Trading Account

Managed by two rival passive investment giants, tracking subtly different indices, and levying different fees, investors would be wrong to think that they are interchangeable.

With a global tracker making up a core holding for many investors, picking the right one requires careful consideration. We analyse each of them to help you decide which to invest in.

How do the funds differ?

The key difference is the index they track. The iShares ETF from BlackRock attempts to replicate the MSCI World index, while the Vanguard ETF tries to track the FTSE All-World index.

MSCI World just includes shares from developed markets, with the ETF investing in 1,514 companies. It is very heavily concentrated in US shares, with 70% of the portfolio invested there, followed by Japan (6%), the UK (4%) and France (3%). There are no emerging market shares, such as Chinese or Indian equities.

In contrast the FTSE All-World Index does include emerging markets, but is not heavily invested there. The Vanguard ETF owns more shares, at 3,688, and is less concentrated in the US. It has 61% in America, followed by 6.3% in Japan, 3.8% in the UK and 3.2% in China. India accounts for 1.8% of the portfolio.

• Are these the only two funds DIY investors need to own?
• Should you copy Britain’s best fund managers, or buy their funds?

These differences mean that the iShares tracker is less diversified, with the top 10 stocks accounting for about 21% of the portfolio. Vanguard’s top 10 accounts for around 17.5%, in contrast. The Vanguard fund has a lower price-to-earnings ratio, at 17.4 times, compared with 18.3 for iShares. This is due to the lower weighting to the highly rated US market.

Fees are comparable, with iShares costing 0.2% and Vanguard costing 0.22%. Both ETFs are very liquid, meaning that the bid-offer spread is minimal on both. The ETFs are large, with £6.3 billion invested in the Vanguard tracker (accumulation share class) and £45.2 billion in the iShares ETF (also accumulation units).

Both funds have similar yields, at around 2%. Both physically own the shares they invest in.

Which has performed best?

Shared performance data exists from 2012, when the Vanguard ETF launched. This was three years after the iShares ETF was launched. Since then, assuming all dividends were reinvested, the iShares tracker has returned 34 percentage points more. It is up 282% compared with 248% for Vanguard’s tracker, according to FE Fundinfo. This is down to its greater weighting to US shares, which has been the best-performing market globally over this period.

Accurate shared data from the underlying indices goes back to spring 2002. Since then, the MSCI World index is up 409% and the FTSE All World index is up 411%. This shows that the outperformance of the MSCI World index is a more recent phenomenon.

• Attempting to time the market costs UK investors 7% of their annual returns
• Fund managers’ biggest concerns and reasons to be cheerful in uncertain times

Which should you buy?

If you’re after a genuinely global portfolio, with more diversification, then Vanguard’s tracker could be more appropriate. It owns more shares and is less concentrated in the US, which may help it if the US’s long run of outperformance comes to an end.

On the other hand, if you think the recent past will be similar to the future, the iShares ETF may continue to deliver better returns. At 70% of the fund though, investors must be aware of how concentrated it is in the US, and how richly valued the portfolio is as a result.

• Portfolio diversification in action: see how it really works
• Record underperformance for active fund managers in this one UK sector
• What are the cheapest ETFs to track global markets?

There is not much point owning both, as there will be a lot of duplication in companies. For those seeking more diversification, Vanguard is the better choice. 

iShares Core MSCI World Ucits ETF is one of ii's Super 60 investment ideas, but that does not mean that Vanguard’s alternative is not an excellent investment.

Picking the right share class is important. For Vanguard, the accumulation share class has the stock market ticker VWRP and the distribution share class (where income is paid out to investors) is VWRL.

Accumulation units of the iShares ETF have the ticker SWDA. If you want distribution units, then you have to buy IWDG, which is a currency-hedged version of the ETF and pays out income. It costs slightly more at 0.3%.

Don’t confuse iShares CoreMSCI World Ucits ETF (SWDA) with iShares MSCI World Ucits ETF (IWRD). The latter is an older ETF, tracking the same market, but charges 0.5%.

Are there alternatives?

There are plenty, as most large fund groups try and offer passive options for global shares. For ETF fans, there are cheaper but less established funds to consider.

One of the cheapest options is the L&G Global Equity Ucits ETF (LGGG), which charges 0.1%. This ETF tracks the Solactive Core Developed Markets Large and Mid Cap Index. However, this is a relatively new fund, listing only in 2018, and has just £45 million invested in it.

There are other ETFs to look at, listed in this article, but not all are traded in pounds, which means that there are foreign exchange fees to consider when you deal.

Open-ended index funds also offer cheap and simple access to global shares, but do not offer instant dealing like ETFs. They are daily dealing, however trades can take a couple of business days to complete.

Funds to look at include Fidelity Index World, which tracks the MSCI World index and costs 0.12%, and HSBC FTSE All World Index, which costs 0.13% and tracks the FTSE All World index. L&G Global Equity Index fund costs 0.08% and tracks the FTSE World Index, which owns around 2,500 shares.