Welcome cheapskates to today’s article, which marks the first in a series diving deep into our own cheapskate portfolio, looking at what we buy and why we invest in them. Today we kick off with the biggest buy in our portfolio – The Invesco MSCI World UCITS ETF.
What is it?
If you’ve read some of our other investing articles, you’ll know that were fans of ETF’s and for us, we feel that this ETF is the best of the lot. This ETF, provided by Invesco is a fund that aims to track the MSCI world total return index. Invesco break it down as: “The Invesco MSCI World UCITS ETF Acc aims to provide the performance of the MSCI World Total Return (Net) Index. The MSCI World Total Return (Net) Index is a free float-adjusted market capitalisation weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of companies from 23 developed market countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.”.
Basically, this fund follows the biggest companies, from the worlds most developed economies.
How many stocks?
The MSCI World index is made up of 1585 companies. Which means when we invest out money in this ETF, we’re getting an incredibly diverse range of stocks in many different sectors.
The first thing you’ll notice about the breakdown on these companies is that the portfolio is heavily weighted to the US. We like this, because it is a true reflection of the US as a powerhouse of the world economy. It’s also pretty heavily weighted to information technology, with over a fifth of it’s funds being allocated to the sector. We like this too, because it means we get exposure to companies like apple and Amazon, without actually having to invest in the stocks specifically.
So, it’s a huge fund (over 2.5Bn in assets under management) offering a mammoth range of the worlds best companies. How much does it all cost? Well, as cheapskates, we feel it’s pretty pricey, with a management fee of 0.19% (for comparison, the likes of the Vanguard S&P500 ETF (VOO) has an expense ratio of just 0.03%! It must be noted though, as far as other world funds go, its pretty much on the money.
However, this ETF does have one trick up it’s sleeve which cheapskates like us are fans of – It’s synthetic. What’s synthetic? We’ll explain, but what it basically means is, you get to keep more of your returns and save money, more than offsetting the additional charge. Nice.
What is a synthetic ETF?
A synthetic ETF is much the same as a standard ETF, in that it tracks a particular index, in this case, the MSCI World Index, which is a collection of the worlds biggest companies. The key difference though is that a synthetic ETF doesn’t actually hold the underlying assets and instead uses a complex set of derivatives to track the price. For example, when you buy a standard ETF tracking the S&P500 that includes companies like Apple and Amazon, you money is actually being invested in those companies. When you invest in a synthetic ETF, your money doesn’t go to these companies. Instead, the fund issuer (in this case, Invesco) uses the money to buy swaps (basically deals with banks to return the same money a company / ETF would return) and other collateral.
The main reason to do this – is that by not holding the underlying stock, the fund doesn’t have to pay the normal dividend withholding tax (which is 30% for the US!!) and other fees, meaning you get to keep more of the returns.
Don’t take our word for it, data shows that this ETF has outperformed it’s physical ETF equivalent by 0.12%. If we offset that against the management fee of 0.19%, it brings our fees to just 0.07%. As cheapskates, we like that number for a world ETF!
So how much of our portfolio does this ETF make up?
This is the largest stake in our stocks and shares ISA, at 37.4%. Big enough to provide a solid base, but not too big that it could have a drag on some of our higher potential picks due to it’s diversity. We will take a look at some other holdings in the portfolio in our next portfolio focus article.
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