Passive Investors - ETF Portfolio Discussion

Cameron, one month later, have you implemented your proposed ETF portfolio yet, or are you still working on your plan?

What the basis for this?

Major pensions funds are beginning to rotate into TIPS and gold. CBS are still buying gold over USD. Even if retail investors sell all of their holdings, they are not the main market for gold.

I got my timelines wrong but you can see gold starting to rise again as USD weakened last week. Before the latest increase it hovering at 1920-1940

Here’s the passive part of my portfolio now.

Ticker Name Tilt TER Weghting
£VWRL FTSE ALl World None 0.22% 15.61%
£VVAL Global Value Factor Value 0.22% 16.78%
£WLDS MSCI World Small Cap Small Cap 0.35% 12.45%
£CSP1 S&P 500 US 0.07% 20.54%
£VEUR FTSE Dev Europe Europe 0.10% 12.78%
£VFEM Emerging Markets Emerging 0.22% 7.18%
£ISF FTSE 100 UK 0.07% 12.17%
£IIND MSCI India Emerging 0.65% 2.48%

This gives a weighted TER of 0.18% and you can see the breakdown by country / sector here

I sold my global bonds position, I changed my mind and decided to avoid a significant fixed income position at the time. I’m still holding a bit of cash and haven’t used all of my ISA allowance this year so if we see another downturn I can average down quite a bit anyway.

Current Considerations
A few things I’m thinking of doing:

  • Increase Emerging Markets, Decrease UK weighting

  • Swap S&P 500 for a North American total cap index (this shouldn’t be massively different). I just think the S&P is a bit arbitrary and I have no reason to be excluding Canada

  • Sell my FTSE All World and move the allocation into the other ETFs (one less to worry about + slightly cheaper)

  • Increasing my tilt towards Value (maybe 20% value and 10% small cap)

Active vs Passive
My portfolio (ex cash) is currently 60% Passive 40% individual stocks, an increase from the OP. I’d like this to be closer to 70/30 in the long term, but I don’t have any plans to re-balance immediately.

This is partly due to some individual stocks outperforming (AMD, JD, GOOGL) and new investments for stocks recently added to the platform (ASML). I’ll likely be selling off a lot of my AMD position next year which will help sort this out.

Total Portfolio breakdown

Geography MSCI World Portfolio
US 57.60% 63.25%
Europe 14.00% 14.61%
UK 4.00% 8.07%
Emerging 14.00% 11.38%
Japan 7.60% 1.97%
Other 2.80% 0.73%
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Thanks for the update, Cameron. It all looks sound and you’ve made some interesting changes.

  • Bonds. For someone who’s 10+ years from retirement, it’s probably OK to have a riskier allocation as there’s plenty of time to do something about it should things deteriorate early on.
  • EM+, UK-. Seems to suit your (apparent) risk appetite better, and reduces the home bias. From my reading around, some think home bias is better for when in drawdown to reduce currency risk.
  • VWRL. Given that you have UK, EM, US, and EUR trackers, it would get rid of the duplication. If it were me, not only would I swap the VUSA for VNRT (if I’ve interpreted your S&P/North America remarks correctly), but switch VEUR for VERX to avoid UK duplication. Keeps it cleaner.

Being pedantic, VVAL isn’t passive :slightly_smiling_face:

Thanks for the feedback. Good points around the duplication, yes I will look to swap to VNRT and VERX for simplicity, thanks!

Oops my mistake, good catch. This is actually something that has annoyed me when I looked for a truly passive Value ETF (I actually requested the iShares MSCI World Value ETF). That said the TER is good and actually cheaper than some of the truly passive value ETFs (such as the one below) so I’m not too fussed.

Thanks too for alerting me to VVAL.

Starting this month, I’ll start building up a holding in that, and if I still feel the same way in a few months time, I’ll move across some of my existing VHYL holdings to that (and add the remainder of the VHYL to my VWRL holding - your dividend mantra is taking effect!). Like you say, VVAL is only 0.22% TER even though it’s active, and whilst I’m a passive man at heart, not dogmatically so :slight_smile:

It’s a shame that VVAL is accumulating rather than distributing though - I’m still unclear on how the dividend income accrued by an ETF fund reflects itself in the ETF share value. I’ve assumed that the latter is purely demand/supply.

Accumulating ETFs are actually my preference as I’d want to reinvent dividends anyway and that’s what they do automatically. You could reinvest manually with a distributing ETF and get about the same result.

When a dividend is issued the fund use that cash to buy more of the underlying basket of shares so the value increases by the same amount. There can be some very minor differences between if you did this perfectly by holding the underlying shares just because of some time delays between when the fund reinvest but this is extremely small in practice.

So if you have 1 unit of an ETF worth £100 (e.g. reflecting ownership of 100 x £1 shares) and the total dividend paid is £10 then they will use that to buy 10 more shares and 1 unit of the ETF will be worth £110 (reflecting ownership of 110 shares)

Accumulating ETFs are actually my preference
Hard luck. Even where the issuer provides both a distributing and accumulating version of an ETF, Freetrade seems to favour listing only the former.
When a dividend is issued the fund use that cash to buy more of the underlying basket of shares so the value increases by the same amount.
I get the first part of that, but I don't understand how they can force an increase in the market price of the ETF. Looking at the info on the Vanguard website, they are showing a share value for VVAL of £21.45 (cf Freetrade app £21.50) and assets of $224m, spread across 1,192 stocks (including maybe a small amount of unexpended cash).

My assumption here is that if on Tuesday I go to buy a share of VVAL the price will have started the day at around £21.45. Obviously, the price will vary during the day, presumably due to the usual workings of supply and demand.

However, if later on Tuesday (having bought my one share), Vanguard received, say $2m of dividends, the assets will have risen to $226m (a 0.9% rise), with the dividend cash being used to purchase more stocks as you say. But how does that 0.9% rise become reflected in the marketplace? In other words, how do sellers/buyers reflect this? Would it require market makers to intervene somehow?

Thanks for answering this puzzler! :slight_smile:

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Yeah this is a bit complicated but fortunately popular ETFs (such as most of those on Freetrade) are extremely well arbitraged so it’s safe to assume they very accurately reflect the value of their underlying holdings (although do note these holdings may not be exactly the same as the index they seek to track, hence tracking errors).

If the value of an ETF deviates from the value from its underlying components (net asset value) for whatever reason (e.g. a big spike in demand for the ETF) then this creates an opportunity for market makers. This ultimately gets resolved by either the creation or destruction of new units of the ETF, in this case underlying assets are exchanged for units of the ETF (which certain institutions are eligible to do).

This is also the mechanism by which demand for an ETF feeds back into the prices of the underlying assets. If there is a spike in demand for VVAL then in order to maintain correct pricing new units of VVAL must be created. In order for new units of VVAL to be created the underlying assets must be exchanged. This in turn drives demand for the underlying assets, increasing the prices of the constituents of the index.

Market makers would quickly identify the 0.9% increase in assets and buy up units of the ETF knowing that either they or other market participants are able to exchange them for the underlying shares, thus earning a premium.

In normal market conditions I don’t think ETFs can sustain much deviation from their fair value so I wouldn’t really worry about it.

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Thanks very much for that. It’s complicated as you say.

I have to admit that I wasn’t overly concerned about it but just curious as to how it actually works. And clearly the system works given that ETFs have been around for, what, nearly 30 years? I had assumed that this was extremely unlikely to be a repeat of 2008 with its flawed financial products!

In simple terms just think that an ETF can be exchanged for its underlying assets (or vice-versa), although admittedly not by us mortals. That ability to exchange means it should never be priced very far away from the assets it holds.

Passive portfolio update following the notes from @anon51767692 (thanks)

Portfolio ETF Link

Ticker Name ISIN Current Weighting
LON:VVAL Global Value IE00BYYR0B57 19.37%
LON:WLDS Small Cap IE00BF4RFH31 11.81%
LON:VNRT FTSE North America IE00BKX55R35 34.75%
LON:VERX FTSE Developed Europe ex UK IE00BKX55S42 8.94%
LON:VFEM FTSE Emerging Markets IE00B3VVMM84 8.26%
LON:VAPX FTSE Developed Asia Pacific ex Japan IE00B9F5YL18 3.00%
LON:ISF FTSE 100 IE0005042456 11.54%
LON:IIND MSCI India IE00BZCQB185 2.34%
LON:VJPN FTSE Japan IE00B95PGT31 2.99%

As I continue to top up I think I’m going to reduce my UK exposure and keep the rest fairly balanced

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After reading your posts @Cameron I have gone through with the following:

Check it out here

Think I am quite happy with that…what do you think? Anything you would change?

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I like the way you leave the exchange reference at the start of the ticker. :slight_smile: That India ETF has a high OCF: hope it’s worth it!

Haha yeah it’s straight from my Google Sheets

Yeah that India ETF is crazy expensive, I’m probably going to keep my India allocation v small so I’m not too fussed - I just wanted a bit more exposure there.

As the Monevator site once said of high costs: they nibble away at your returns like a satanic mouse.

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It’s interesting that MSCI and FTSE World Indexes weight so heavily towards the US. I understand that the US has the biggest stock markets and Caps however as a country it’s share of the World GDP is not 50-60%. This is why I decided to weight slightly more on Emerging Markets as although they are not developed, countries like China, India, Brazil are a large part of the world’s GDP. This comes with higher risk but in my own view a better (but not perfect) reflection of the world’s market.,

I agree in general and people often point to how big Japan was in terms of global capitalisation (I think also ~50%) and how that slipped away.

Bear in mind that not all GDP flows through public companies. If you weighted by GDP you could end up with huge allocations to tiny companies in countries that have largely private (or national) companies. Think of all the small Saudi stocks you’d be owning pre-Aramco IPO just because of their GDP but not at all reflective of those company’s size within the world.

Also lots of US-listed companies are global so would show up in GDP figures elsewhere despite being capitalised in the US.

Yep good points here and partly why I’m not trying to match the world GDP proportions. I just wanted to offset the US skew driven by having more publicly listed companies and most megacaps