Battle of Titans: S&P 500 vs. All-World ETFs – A Long-Term Investor’s Guide 🌍 💼

Investing is a crucial part of financial planning, and for long-term investors, choosing the right ETF (Exchange-Traded Fund) can make a significant difference in portfolio performance. Two popular options are the S&P 500 ETF and the All-World ETF. Let’s explore the characteristics, performance, benefits, and potential downsides of each to help EU investors make an informed decision.

S&P 500 ETF 📈

Overview:

• Composition: Tracks the S&P 500 Index, which includes 500 of the largest publicly traded companies in the United States.
• Geographic Focus: Exclusively U.S.-based, representing about 80% of the U.S. stock market’s total value.
• Sector Allocation: Heavily weighted in technology, healthcare, and financials.
• Examples Available in the EU: iShares Core S&P 500 UCITS ETF (SXR8), Vanguard S&P 500 UCITS ETF (VUSA), SPDR S&P500 UCITS ETF (SPY5).

Benefits:

1. Focus on U.S. Market 🇺🇸:
   • Economic Stability: The U.S. economy is one of the largest and most stable, providing a solid foundation for investments.
   • Innovation Hub: Home to numerous innovative companies, particularly in technology, which can drive growth.
2. High Liquidity 💧:
   • Trading Volume: S&P 500 ETFs are among the most traded, ensuring that investors can buy and sell shares easily.
   • Tight Spreads: High liquidity often leads to narrower bid-ask spreads, reducing the cost of trading.
3. Stable Companies 🏛:
   • Blue-Chip Stocks: Includes many well-established companies with strong track records of performance and profitability.
   • Dividend Payments: Many S&P 500 companies regularly pay dividends, providing a source of income.
4. Low Costs 💰:
   • Expense Ratios: S&P 500 ETFs typically have low expense ratios, making them cost-effective for long-term investors. 💡 At the time of writing this article, the ETF with the lower fees for EU investors is SPDR (SPY5) with TER 0.03%.
5. Tax Efficiency 🧾:
   • Irish Domicile: Many S&P 500 ETFs available to EU investors are domiciled in Ireland, benefiting from favorable tax treaties and reducing withholding taxes on dividends.

Disadvantages:

1. Lack of Geographic Diversification 🌍:
   • Concentration in the U.S. Market: S&P 500 ETFs focus exclusively on U.S.-based companies. This lack of geographic diversification means that investors are heavily exposed to the U.S. economy. If the U.S. market underperforms or experiences economic difficulties, the ETF’s performance could be significantly impacted.
   • Economic and Political Risks: Being concentrated in one country, S&P 500 ETFs are more susceptible to specific economic and political risks, such as changes in U.S. fiscal policy, interest rates, and regulations.
2. Sector Concentration 📊:
   • Heavy Weighting in Certain Sectors: The S&P 500 has a significant weighting in sectors like technology, healthcare, and financials. This sector concentration can lead to higher volatility and risk if these sectors face downturns.
   • Limited Exposure to Emerging Industries: By focusing on established U.S. companies, the S&P 500 ETF may miss out on high-growth opportunities in emerging industries and markets outside the U.S.

All-World ETF 🌍

Overview:

• Composition: Aims to track the performance of the global stock market, including both developed and emerging markets.
• Geographic Focus: Broad global exposure, covering North America, Europe, Asia, and other regions.
• Sector Allocation: More diversified across various sectors compared to the S&P 500.
• Examples Available in the EU: Vanguard FTSE All-World UCITS ETF (VWRL), iShares MSCI ACWI UCITS ETF (IUSG).

Indices for All-World ETFs:

There are three primary indexes commonly used by All-World ETFs, each with its own characteristics:

1. FTSE All-World Index:
   • Composition: Includes large and mid-cap stocks from around the globe, covering approximately 90-95% of the investable market capitalization.
   • Geographic Coverage: Developed and emerging markets.
   • Example ETF: Vanguard FTSE All-World UCITS ETF (VWRL or VWCE).
2. MSCI ACWI (All Country World Index):
   • Composition: Includes both large and mid-cap stocks from developed and emerging markets, similar to the FTSE All-World Index. It covers around 85% of the world’s markets capitalisation.
   • Geographic Coverage: Comprehensive global exposure including approximately 23 developed markets and 26 emerging markets.
   • Example ETF: iShares MSCI ACWI UCITS ETF (IUSG).
3. MSCI ACWI IMI (All Country World Investable Market Index):
   • Composition: Includes large, mid, and small-cap stocks from both developed and emerging markets, covering approximately 99% of the global investable equity market.
   • Geographic Coverage: The most comprehensive, covering more countries and more companies than the other indexes.
   • Example ETF: SPDR MSCI ACWI IMI UCITS ETF (SPYI).

Benefits:

1. Global Diversification 🌐:
   • Risk Mitigation: Spreads investments across various countries and regions, reducing the impact of any single country’s economic downturn.
   • Opportunity Access: Allows investors to capitalize on growth opportunities in different parts of the world.
2. Exposure to Growth Markets 🚀:
   • Emerging Markets: Includes emerging markets which can provide significant growth potential due to rapid industrialization and economic expansion.
   • Developed Markets: Balances growth potential with the stability of developed markets.
3. Sector Diversity 🔄:
   • Broad Coverage: Less concentrated in specific sectors, offering a more balanced approach.
   • Adaptability: Reflects changes in the global economy, including the rise of new industries and sectors.
4. Comprehensive Market Coverage 🌎:
   • All Cap Exposure: Some All-World ETFs cover large, mid, and small-cap stocks, providing extensive market exposure.
   • Dynamic Allocation: Adjusts to market trends and shifts in global economic power.
5. Tax Efficiency 🧾:
   • Irish Domicile: Similar to S&P 500 ETFs, All-World ETFs domiciled in Ireland can also provide tax benefits, but the diverse geographic exposure means dealing with a wider range of withholding tax rates.

Disadvantages

1. Higher Costs 💸:
   • Expense Ratios: All-World ETFs generally have higher expense ratios compared to S&P 500 ETFs. This is due to the complexity of managing a globally diversified fund, which involves dealing with multiple markets, currencies, and regulatory environments. These higher costs can eat into the long-term returns of the investment.
   • Operational Costs: The costs of rebalancing and managing investments across various countries and regions can be higher, impacting the net returns for investors.
2. Currency Risk and Geopolitical Factors 💱:
   • Currency Fluctuations: All-World ETFs expose investors to currency risk. Fluctuations in exchange rates can impact the value of the ETF, potentially reducing returns or increasing volatility.
   • Geopolitical Risks: Investing globally means being exposed to political and economic instability in various countries. Issues such as trade wars, political unrest, and regulatory changes can affect the performance of the ETF.

How to Invest

Investing in the S&P 500 or an All-World index can be easily done through your brokerage account. Simply search for the ETF that track these indices, such as SPY5 for the S&P 500 or VWCE for an All-World index, and place a buy order just as you would for any stock.

You can refer to our dedicated article that reviews one of the most popular brokerage platform for European investors.

Conclusion 📝

Choosing between the S&P 500 ETF and an All-World ETF ultimately depends on your investment goals, risk tolerance, and market outlook. If you believe in the robust performance of the U.S. economy and prefer a more concentrated, stable investment, the S&P 500 ETF might be the right choice. Its focus on large-cap, stable U.S. companies, high liquidity, and low costs make it a strong contender for long-term growth.

However, if you seek global diversification and are willing to embrace higher volatility for potentially greater returns, an All-World ETF could be more suitable. Its broad exposure to developed and emerging markets, sector diversity, and comprehensive market coverage offer significant advantages for those looking to capture global growth opportunities. While the higher expense ratios reflect the added complexity of global management, the potential benefits of diversification and access to growth markets can outweigh the costs.

Both options have their merits and drawbacks, and a balanced portfolio could even include both to leverage the strengths of each.