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I am looking to begin passive investing in ETFs. In my own research so far I come across the advice that it can be a good passive strategy to invest in some index fund like a Vanguards S&P500, however a lot of financial advice on the internet is very US centric. As a European investor I'd like to reap the benefits that investing in the US market currently offers while still diversifying my portfolio and safeguarding against the possibility that in 30-50 years the composition of the global market looks very different.

To this end I have identified a few different ETFs from Vanguard in euro. The first is the Vanguard S&P 500 UCITS ETF (VUSA) with an OCF of 0.07%. The second Vanguard Vanguard FTSE All-World UCITS ETF (VTRW) at 0.22%. The third is FTSE All-World ex-US ETF (VEU) at 0.08%.

My question is what are the advantages or disadvantages of investing purely in a single global index versus having some split between one S&P500 fund and one global fund which excludes the US portion of the market. Would the differences lie purely in cost and convenience?

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The main difference, like you say, is cost and convenience. The global fund will simplify your portfolio, and will automatically adjust for the market weights of US vs ex-US holdings.

However, if you don't mind the small hassle, you can significantly lower costs by holding the two separate funds. Using an S&P 500 fund misses out on US small-cap companies, so if you have access to it, I'd suggest using a total US market fund, like Vanguard's U.S. Equity Index Fund. If you don't, losing the small-cap diversification is probably worth the 0.13%+ cost advantage vs VTRW.

Importantly, with the two separate funds, you'd need to choose how much to allocate to each. Since these funds are internally market-weighted, it would make the most sense from a diversification standpoint to invest in them based on their market weights (specifically, the market weight of the markets they're representing). As of today, that means having the US fund at ~59% of your equity investment.

This can change over time, so you can check the US vs ex-US split by checking the US percentage of the portfolio of a total world fund (under the Portfolio Composition > Markets tab):

https://investor.vanguard.com/investment-products/mutual-funds/profile/vtwax#portfolio-composition

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  • Or you can hold a separate small-cap fund in addition to the large-cap and international funds. Which, again, gives you the opportunity to adjust the balance between them to reflect your sense of relative risk/reward. This does require that you actually have strategy, admittedly.
    – keshlam
    Apr 12, 2023 at 19:27
  • @keshlam A small-cap fund would be great too. As far as strategy, if you already hold market-cap weighted funds, the default (and in my opinion best) strategy would be: continue using market-cap weights. That's equivalent to what you'd get if you went for the total world fund.
    – Earth
    Apr 12, 2023 at 19:37
  • That's one approach, certainly. There are others, depending on your goals, timeframe, and risk tolerance.
    – keshlam
    Apr 12, 2023 at 23:49
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For US residents, that usually isn't an either-or. You invest in both a domestic index and an international index, adjusting the balance between them to suit your own investment strategy.

I'd presume the same kind of decision gets made by European investors.

If you want to know how much to put in each -- what investment strategy to use -- see past discussions of what goes into making that decision; you can get advice, or you can go by rule of thumb, or you can apply your own judgement, or you can find a fund which handles that for you (but the latter generally costs more, lowering your your rate of return). Which one of THOSE to pick is a matter of opinion and mostly outside our scope.

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The problem is coming up with the right weight of each to give you similar exposures to "the world". You'd have to buy a proportional amount of US and non-US to match the US-exposure of the "world" index, which is not completely obvious (to me). Plus, the US market is bigger then the S&P 500, so "World ex US" + "S&P 500" is not exactly the same as "World". You'd be leaving out some US small-cap exposure from your portfolio. It's not a massive difference, but they are not equivalent.

It's not to say that one is better or worse. As a US investor, I would tend to weight the US market more heavily; as a EU investor, you might add an EU-based fund to put more weight in the EU market. There's not one right answer. The fact that you're somewhat globally diversified is a much bigger factor than the specific allocation.

The relatively high expense ratio on VTRW is another oddity. It's not clear why VTRW has a higher expense ratio than the "world ex-US" counterpart, but the use of UCITS in the fund name may indicate that there are additional regulatory requirements that the other funds do not require. But it would certainly be a higher friction that you'd need to overcome.

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