The Vanguard FTSE Global All Cap Index Fund is the fund of choice for investors seeking global diversification. With the global markets in a potential geo-economic reversal, are global index funds diversified enough?
Investing in the stock market can be a great way to build wealth over time. It’s important to diversify your portfolio beyond just one market or sector. Many investors have started looking towards global markets, particularly emerging economies like China and India, for growth opportunities. Global index funds tend to be weighted towards developed economies and risk missing out on this potential growth.
One popular option for global diversification is the Vanguard FTSE Global All Cap Index, but as this index is currently heavily weighted towards the US. Some investors may wonder if it will ever shift its investments to other countries if they become stronger economically. The FTSE Global All Cap Index is hugely popular. After all, it’s a fantastic way to diversify but it seems like there may be some limitations.
Disclaimer: This is not financial advice and you are responsible for your own investment decisions. When investing capital is at risk. This article contains affiliate links.
Understanding the Vanguard FTSE Global All Cap Index
The FTSE Global All Cap Index is designed to represent the global equity market. That’s because it tracks the performance of large, mid, and small-cap companies in developed and emerging markets worldwide. This index includes over 7,150 stocks and covers 98% of the worlds investable market capitalization. It also has a total fund size circa $2.29bn. The index is weighted based on the market capitalization of each company. Which means that larger companies make up a greater proportion of the index than smaller ones.
Currently, the FTSE Global All Cap Index is heavily weighted towards the US, with around 60% of its market capitalization coming from US companies. This is largely due to the fact that the US stock market is the largest and most developed in the world. With many of the world’s largest companies such as Apple, Microsoft and Amazon based in the US. You will find this is the same for many Global Index Funds such as the Fidelity World Index Fund or the Fidelity Allocator World Fund.
Read: Moneyfarm Review: Is This The Right Investment Platform For You?
Potential Changes in the Vanguard FTSE Global All Cap Index Composition
As the global economy evolves, it’s likely that the composition of the FTSE Global All Cap Index will shift over time. In particular, as the market capitalizations of companies in other countries and regions increase, it’s possible that the index’s weighting towards the US will decrease.
For example, China’s economy has been growing rapidly in recent years, and many experts predict that it will eventually overtake the US as the world’s largest economy. If this happens, it’s likely that the FTSE Global All Cap Index will begin to shift its investments towards Chinese companies.
It’s almost impossible to predict exactly when or how these changes will occur. Economic growth rates and market capitalizations can be influenced by a wide range of factors. This includes government policies, geopolitical tensions, and natural disasters. As a result, it’s important to take a long-term view when investing in global markets and to be prepared for some level of volatility and uncertainty.
Limitations of the Vanguard FTSE Global All Cap Index
Here-in lies the problem. We now expect that economies such as China, whilst volatile will make up an increasing share of the global economy. This raises the question, why not hedging in favour of China now. That way we can reap the benefits of growth.
Leading developed market indexes such as the S&P 500 currently have a P/E ratio 44% higher than the historical average. In fact, mega-cap technology stocks such as Apple have been saturating more of the Large Cap stock indices. By consequence many of the US weighted funds could be considered overpriced.
Emerging Markets Offer Long-Term Growth Opportunities
Emerging market economies, such as China, India, and Brazil, are often considered riskier investments compared to developed countries. While it’s true that emerging markets can be volatile, there is strong evidence to suggest that these EM offer better long-term growth potential than developed economies. With stocks in EM and international markets set to beat U.S stocks.
Many leading experts would argue in favour of Emerging markets due to favourable long-term growth opportunities. JP Morgan highlight that following a long bear market, emerging markets are now entering a bull market cycle. JP Morgan Strategies identify that EM are priced well for investors. 40% below their February 2021 cycle peak.
The Emerging Markets Index MSCI or the FTSE Emerging Markets Index fund can capture these high growth emerging markets. Fund of funds such as the Fidelity World Allocator fund capture Fidelity Index Emerging Mrkts F Acc which tracks the MSCI Emerging Markets (Net Total Return) Index. As this is an activley managed fund, is may be able to hedge towards Emerging Markets should it see fit.
Read: Is The FTSE Developed World Ex-U.K. Fund The Right Choice For Future Growth?
Emerging Markets & Macroeconomic Fundamentals
One of the primary reasons why emerging market economies offer favourable investment opportunities is their macroeconomic factors. These economies are typically characterized by a younger and growing population, lower labour costs. These factors help drive economic growth and can lead to increased productivity, innovation, and entrepreneurship.
Lazarus Asset Management outlines the “growing middle class comes a consumer that is younger, increasingly more educated, and a faster adopter of new technology, with constantly changing consumption patterns and preferences.” Furthermore, emerging market economies are typically in the early stages of industrialization, meaning that there is significant room for growth in many sectors, including manufacturing, infrastructure, and technology. By contrast, developed economies have already gone through this process, which can limit growth potential. The United States, Japan, and Europe, tend to have aging populations and higher labour costs, which can slow down economic growth.
Debt Levels in Developing Nations vs Developed Countries
Another factor that makes emerging market economies attractive for investors is the level of debt in these countries compared to developed countries. In general, developed countries tend to have higher levels of debt as a percentage of GDP compared to emerging markets. For example, the United States has a debt-to-GDP ratio of over 144%, which is one of the highest among developed countries. In contrast, China’s debt-to-GDP ratio is around 76%, which is lower than many developed countries.
While high levels of debt can be a concern for investors, it’s important to note that developing countries typically have more room for growth, which can help them generate the revenue needed to pay down debt over time. It’s also worth noting that emerging market economies tend to have lower levels of consumer debt compared to developed countries. This can be an advantage in times of economic downturn, as consumers are less likely to default on loans. This can help stabilize the economy.
Read: What You Need To Know About The Fidelity Special Situations Fund
Debt Ceiling in the United States
The United States recently hit its debt ceiling. Which is the maximum amount of money that the government can borrow to fund its operations. This has led to concerns about the country’s ability to repay its debt and maintain its credit rating. While this may be a concern for some investors, it’s important to remember that the United States is still considered a relatively safe investment compared to many emerging market economies.
The US economy is still the largest in the world, and the country has a strong track record of economic growth and stability. However, the debt ceiling debate does highlight the importance of considering a diverse range of investment opportunities to mitigate risk. It’s unlikely that the United States would default on it’s debt and they have always raised the debt ceiling. In the event they were to default it would have disastrous global consequences. which would impact both Developed and Emerging Markets.
Risk Considerations for Developed Market Investors
Investors who are seeking to diversify their portfolios beyond the S&P and invest in global markets should consider a few important factors. It is crucial to have a well-diversified portfolio that aligns with an investor’s risk tolerance and investment goals. Spreading investments across different asset classes and regions can reduce overall risk and potentially increase returns over time.
Diversifying your portfolio across different asset classes and regions can help reduce overall risk and potentially increase returns over time. Emerging markets are usually considered high risk markets and nothing has changed here. On the other hand, portfolios weighted towards developed markets and the united states have their own risks to consider.
It is also important to understand the limitations of using a passive index fund like the FTSE Global All Cap for global diversification. While the index is designed to represent the global equity market, it may not take advantage of undervalued areas of the market. Thus is may not be able to exploit market opportunities efficiently enough. Investors may have to actively invest in funds tracking the MSCI Emerging Markets Index or the FTSE Emerging Markets index to gain adequate exposure.
Seeking Shelter In Emerging Markets Assets
As developing markets grow, it will shift its investments automatically based on changes in the global economy. Therefore, investors must actively consider if they should actively, invest a greater allocation of their portfolio to EM markets than the standard global fund.
Given the instability in Developed markets, 61% of the 234 money managers, analysts and traders surveyed said they expect to increase exposure to developing assets. With investors actually “seeking shelter in Emerging Markets”. Funds that actively track the MSCI Emerging Markets Index or similar may provide a healthy level of diversification.
Conclusion FTSE Global All Cap: Adequate Exposure to Emerging Markets?
In conclusion, diversifying a portfolio beyond the S&P 500 and investing in global markets can be an effective way to reduce overall risk and potentially increase returns over time. The FTSE Global All Cap Index is a popular option for global diversification, but it’s important to understand its limitations and consider all options for achieving diversification.
The FTSE Global All Cap currently invests around 10% of it’s allocation to Emerging Markets. Tom Stevenson at Fidelity International argues “that as a rule of thumb investors should invest less than 10% and no more than 20% of thier portfolio”. Morgan Stanley suggest this should be higher at 26%.
Shifts in the global economy may naturally lead to a decrease in the FTSE Global All Cap index’s weighting towards the US over time. On the other hand EM may form a much larger part of the allocation. When and how fast this will happen is almost impossible to estimate. Investors looking to capture the potential gains of Emerging Markets may want to consider benefits of actively managed global equity funds. Alternatively investors may look towards self-diversifying using a fund such as Emerging Markets Fund. This may include such funds as:
- Vanguard Emerging Markets Stock Index Fund
- Vanguard FTSE Emerging Markets UCITS ETF
- Fidelity Index Emerging Markets Fund
- iShares Emerging Markets Equity Index Fund Class D Acc
- iShares Core MSCI Emerging Markets IMI – Available With Lightyear.
- iShares MSCI Emerging Markets SRI – Available With Lightyear.
- iShares Edge MSCI Emerging Markets Minimum Volatility – Available With Lightyear.
ESG Emerging Market Options Available:
- Vanguard ESG Emerging Markets All Cap Equity Index Fund
- Vanguard ESG Emerging Markets All Cap UCITS ETF
Ultimately, investors should work with a financial advisor to determine the best investment strategy for their individual needs. By taking a thoughtful and informed approach to global investing, investors can achieve a well-diversified portfolio that aligns with their goals and helps them achieve long-term financial success.
Conclusion: Vanguard FTSE Global All Cap VS Emerging Markets
Emerging market economies offer favourable investment opportunities due to their macroeconomic factors and lower levels of debt compared to developed countries. While these economies may be more volatile in the short-term, they offer greater long-term growth potential. An index fund tracking the MSCI Emerging Markets Index may offer healthy exposure to growing assets.
It is worth noting that the FTSE Global All Cap Index does invest around 10% in Emerging Market funds. Therefore there is a healthy level of limited exposure so Emerging Markets. It very much depends on the investors conviction in Emerging Markets or doubt in the United States economy, as to whether this is enough.
As with any investment, it’s important to think about how an EM equity fund fits into your overall portfolio. Specifically, be sure your allocation to equity funds fits your investment timeframe and risk tolerance. Why not start investing in Emerging markets with a free cash bonus:
- Get a £10 to invest with Wombat when you sign-up to my mailing list. Receive £10 to invest when you Open a Standard ISA or GIA, or Instant GIA. When investing capital is at risk.
- Get a free share with Freetrade when you sign-up to my mailing list. The free shares are worth between £10 and £100.
When investing capital is at risk.
