Today, Vanguard’s new Total World ETF (VT), tracking the FTSE All World index, became available to trade.  It’s too early to get into the ETF, because there is virtually no volume, but this fund deserves watching.

The FTSE All World Index covers 47 countries and 2,908 companies, including both developed and emerging markets.  FTSE says the index covers 98% of the investable world universe.

The ETF from Vanguard charges a 25 basis point fee.  The sister mutual fund (VTWSX) has a higher expense ratio and charges a 2% fee for redemptions in the first two months (not a factor for the ETF).

In the short term, the mutual fund would be a better choice if you have a time horizon over 2 months, because of the liquidity factor.

The mutual fund will definitely execute at NAV on the day you place your buy order and will definitely execute at NAV on the day you place your sell order.

However, the ETF may not execute at all on the day of an order given the negligible initial volume.  Here is a place where Vanguard has a strength that most other ETF sponsors don’t have — the ability to offer a mutual fund or an ETF for the same objective (actually the same investment pool).

Here is a listing of the top ten country holdings and the sector weightings as provided today in a FTSE email to investment advisors:

This fund will likely be useful to some investors as a core equity holding, to which they would add other country and sector funds to “tilt” their equity exposure this way or that, based on their situation and market views.

Note: FTSE is a joint venture of the Financial Times of London and the London Stock Exchange.

Richard Shaw
QVM Group LLC

Knowledge of the country weights in the emerging and developed markets indices can be helpful in specifying allocations within the equity portion of a portfolio.

For those clients who wish to allocate primarily on a country basis (as opposed to a sector basis, for example), our general philosophy is to begin the design process from the starting point of world market capitalization, then deviate from there as appropriate per client.

More specifically, we recommend placing at least 50% of equity assets in broad index funds in proportion to world market capitalization.  Then, depending on your degree of aggressiveness and your confidence in your assessment of markets, placing up to 50% of equity assets in regional or country funds with anywhere from minor to massive overweights or underweights.

In order to make a conscious overweight or underweight decision, you need to know the neutral weights.

The major weight categories, US (proxy VTI), non-US developed (proxies EFA + EWC) [see prior article], and emerging (proxy VWO) are: 41.08%, 48.35% and 10.57% respectively, according to S&P/Citgroup Global Broad Market Indices, as of June 24, 2008.

The individual country weights (and proxy investment funds) for the developed markets and the emerging markets are provided in the following two graphic tables:

World funds would tend to contain stocks from all the listed countries, but you don’t lose much by constructing your own “world fund” with the available investment proxies, since they cover about 97% of the developed world market-cap.

Note: The major indexers tend to use the term “world” to refer to the developed world only, and the term “global” or “world all countries” to refer to the combined developed and emerging countries.

A smaller portion of the emerging market countries have their own proxy investment funds, but they comprise about 90% of the emerging markets capitalization in total.

There is much more to consider than simply market weights, however knowledge of market weights in your allocation program is important to understanding how your risks and opportunities differ from a world neutral allocation.

Finally, you need a benchmark.  You might consider using the world index performance as the benchmark against which you measure whether or not your “tilted” investments are adding value.

Richard Shaw
QVM Group LLC

[Securities mentioned in this article: VTI, EFA, EWC, VWO, EWZ,FXI,EWT, RSX, INP, EZA,EWW, EIS, EWM, ECH, IF, TUR, THD, VTI, EWJ, EWU, EWC, EWQ, EWG, EWA, EWL, EWP, EWI, EWY, EWN, EWD, EWH, EWS, EWK, EWO, IRL ]

When you invest in emerging market indices and in non-US developed market indices, you are not only exposing your portfolio to different sales and earnings growth rates, but also to different industrial sectors.

The table, based on the S&P/Citigroup Global Broad Market Indices, shows the ratio of free-float market-cap of the GICS (Global Industrial Classification System) sectors in the emerging markets versus those of the developed markets, excluding the US market.

In total, the emerging markets provide a lot more Telecom and Energy, and a lot less Health Care and Consumer Discretionary, for example.

The broad emerging markets are represented by exchange traded funds such as EEM from Barclay’s and VWO from Vanguard.

The non-US developed markets are represented by exchange traded funds such as EFA from Barclay’s and VEA from Vanguard, in combination with EWC from Barclay’s, which tracks Canada.

Note the the EFA and VEA products track the MSCI/Barra Europe Australasia and Far East Index, which does not include Canada.  EFA + EWC or VEA + EWC will cover the developed world excluding the US (see prior article for relative Candada and EAFE weights).

Richard Shaw
QVM Group LLC