Build a Global Diversified Portfolio with These ETFs
The stock market is highly volatile with global headwinds playing foul since the start of the year. This erratic market behavior is expected to continue over the coming months.
The oil price slide and persistent China weakness can mainly be blamed for raising concerns over global slowdown and deflation. Additionally, slower growth in other emerging markets and developed economies, uncertainty in the Fed policy as well as a strong dollar continue to weigh on stock returns.
Shrugging of all these uncertainties, the U.S. stock market saw its best start to March in over than three years with all the three major indices gaining more than 2%. The impressive jump was driven by bargain hunting, a higher oil price, and a slew of positive news data flow into the economy (read: ETFs & Stocks from Top-Ranked Sectors to Buy Now).
Global Trends on the Mend
U.S. construction spending rose to the highest level since October 2007 and manufacturing data for February came in better than expected, reflecting that the economy, no doubt, is gathering steam and is not falling into a recession. Additionally, auto sales soared to 15-month high in February. Last month, encouraging data pertaining to retail sales, consumer spending, producer prices, factory production, inflation, and an upward revision to the second estimate of Q4 GDP fueled optimism.
All these solid data could influence the interest rate policy of the Fed, which hinted at a delay in the March rate hike plan in its latest minutes. Further, solid GDP data from Australia and Canada infused confidence in the global economy, giving a boost to the stocks.
The international fundamentals seem to have improved lately with hopes of additional stimulus from the central banks of Europe and Japan. China was the latest to step up its effort to stimulate its sagging economy by cutting the reserve requirement ratio early this week (read: ETFs to Gain from China's Added Stimulus).
Given the recovering macro trends, investors’ seeking to remain invested in equity markets should have a well-managed and diversified portfolio. A diversified portfolio in the equity world refers to investing in stocks of different companies, securities, industries, and countries in order to minimize overall risk and achieve optimal risk-adjusted returns. This could be easily done by investing in ETFs.
While there are several ETFs that offer diversification benefits, we have highlighted four that seek to offer solid exposure to the global equity markets with a lower level of risk. This is especially true given that these products hold a great deal of stocks and do not allocate a big chunk of assets to any particular security or a sector, though they are skewed toward the domestic market. Further, these funds have a solid Zacks ETF Rank of 2 or ‘Buy’, implying that they will outperform the broad market in the coming months (see: all the World ETFs here):
Vanguard Total World Stock ETF (VT)
This fund provides a broad exposure to both U.S. and foreign stocks by tracking the FTSE Global All Cap Index. Holding a large basket of 7442 securities, none of the firms accounts for more than 1.4% of total assets and each sector has less than 16% allocation. American firms account for nearly 55.7% share while Europe and Asia Pacific round off the top three with double-digit exposure each. The fund has more than $5.2 billion in AUM and sees a solid volume of nearly 953,000 shares a day. It charges 14 bps in fees per year from investors and has lost 4.5% so far this year.
iShares MSCI ACWI ETF (ACWI)
This fund follows the MSCI ACWI Index and holds 1296 securities with none of them making up for more than 1.64% of assets. Financials, information technology, consumer discretionary, industrials and healthcare are the top five sectors with a double-digit allocation each. In terms of country exposure, U.S. takes the top spot at 51.8% while other countries like Japan, United Kingdom, and Switzerland make a nice mix in the fund’s basket. ACWI is the most popular and heavily traded ETF in the global space with AUM of nearly $6 billion and average daily volume of more than 2.7 million shares. Expense ratio comes in at 0.32%. The ETF has shed 4.2% in the year-to-date timeframe (read: 3 Momentum Stocks & ETFs to Play).
SPDR MSCI World Quality Mix ETF (QWLD)
This fund offers exposure to the stocks of 24 developed countries that have value, low volatility and quality factor strategies. This is done by tracking the MSCI World Quality Mix Index. The product holds a basket of 1030 stocks with each holding less than 1.9% share. Sector wise, financials, healthcare, information technology, consumer discretionary and consumer staples make up for the top five sectors, with double-digit allocation each. The product allocates about three-fifth of the portfolio to the U.S. while Japan and U.K. make up for 8% share each. It has accumulated $5.8 million in its asset base and charges 30 bps in fees per year from investors. Volume is paltry at under 1,000 shares daily. The ETF is down 3.2% so far this year.
SPDR MSCI ACWI IMI ETF (ACIM)
This fund tracks the MSCI ACWI IMI Index with a broad exposure to 797 stocks of the developed and emerging markets. None of the firms accounts for more than 1.23% of ACIM while each sector takes less than 20% share. Half of the portfolio is allotted to U.S. firms while other countries like Japan and United Kingdom receive a single-digit allocation each. The fund has been able to manage $34.2 million in its asset base while trades in a light volume of 4,000 shares a day on average. It charges 25 bps in annual fees and has lost 4.4% in the year-to-date timeframe.
Bottom Line
These products could be worthwhile for investors seeking to participate in the global recovery with less risk and higher diversification benefits.
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VANGD-TOT W STK (VT): ETF Research Reports
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
SPDR-MSCI WQM (QWLD): ETF Research Reports
SPDR-M ACWI IMI (ACIM): ETF Research Reports
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