Originally published at: All the world in an ETF – InvestEngine Insights
You’ve probably heard the expression, there’s safety in numbers. It means it’s generally less risky to do something if lots of other people are doing it rather than doing it alone. Although probably not its original intention, that adage could be applied to investing due to the way markets work. Let’s look at why many investors may wish to consider a simplified approach to diversified equity exposure.
Economists, equity analysts, fund managers. These trained professionals are paid essentially to predict the future using huge amounts of data and sophisticated modelling tools. Some will be right more often than others, but even the best ones will be wrong from time to time. Hey, if it was easy, everyone would do it.
What chance does the average person have who lacks the technical training, time and resources? Most of us have other jobs to do and, let’s face it, who enjoys reading 150-page company reports?
That’s where “investing in the market” comes in.
Instead of trying to beat everyone else – and risk getting it horribly wrong – many investors would be happy getting the average return. That’s especially true for long-term investors. By average, you can think of the return of the market, which you’ll hear referred to in terms of an index.
What is an index?
An index – any index – is a measure of values. With a stock market index, those values are the prices of a group of stocks meant to represent that specific stock market. For example, the FTSE 100 index measures the price performance of the largest 100 stocks listed on the London Stock Exchange. These stocks – also known as “shares” or “equities” – are of the largest companies in the UK.
Each stock in the FTSE 100 index is weighted by size, such that the largest has the most weight, then the second-largest weight and so on until you get to the 100th (or smallest) stock, which has the smallest weight in the index. This is an example of a market-capitalisation weighted index.
This methodology may reflect the success of a company – and the market’s expectations of its future success – relative to other companies in the index. And when we say “the market” we really mean all the investors. When a stock’s price goes up, it’s because the market, i.e., investors, are pushing it up, usually because there are more investors trying to buy it than are willing to sell it.
It’s not one person buying the stock, it’s lots of people. Kind of like the comfort you get when trying a new restaurant and seeing it full rather than empty. There’s safety in numbers.
Why would I want to invest in an index?
An important point to clarify is you can’t invest in an index. But if you want the index performance, what you can do is invest in an Exchange-Traded Fund (ETF) that aims to track the index. A big reason so many people invest in ETFs is for the diversification they provide.
You can find plenty of examples where a company ran into some sort of trouble and its stock price tanked. If that stock was the only thing you owned, you could end up losing everything, whereas investing in an ETF reduces the impact by giving you exposure to all the stocks in the index.
The basic idea is that, in any given day, the price of some stocks in the index will go up and some will go down. If you add up all those daily movements over say a five-year period, you may reasonably expect a positive return. That’s because you would be “smoothing out” the ups and downs. And the longer the time frame – say 10 to 20 years, for instance – the better the odds of success.
Diversification is more than just a numbers game
There’s more to diversification that just investing in lots of stocks. You could invest in 1,000 stocks but it’s not going to do you much good if they all perform the same. Instead, you want a wide variety of stocks that behave as independently as possible.
The stocks making up the FTSE 100 index include companies in many different industries, some performing better than others in difference conditions. For example, travel companies tend to do better when the economy is booming, and consumers have confidence to spend their money. However, they are often first to feel the pinch when consumers tighten their belts.
Some other companies don’t go through as many peaks and troughs because they’re providing the goods and services that people need all the time, like food, health care and basic utilities. When you combine these “slow and steady growers” with those that may experience more dramatic ups and downs, you are gaining exposure to different opportunities. You’re gaining diversification benefits.
Now let’s think more globally
So far, we’ve focused on the UK stock market, which makes sense with many people investing a decent chunk of their portfolio in their local market. However, this “home bias” often doesn’t make sense. If you’re investing primarily in UK companies, you’re restricting your investment potential. You may find comfort in knowing more about the companies on your doorstep, but they’ll be driven by the same economy, currency and even politics that influence your personal finances.
Economies generally go through similar cycles of expansion and contraction but not always at the same time and for the same duration. Let’s say, for example, the UK economy is slowing down, but countries halfway across the world might be experiencing rapid growth. If you were to invest in a wide range of companies from both developed and emerging markets, you would have exposure to companies that stand to benefit from their domestic economies when they expand, some that may do well when their economies contract, and others that have steadier growth throughout the cycle.
The question is, how do you gain exposure to such a massive range of opportunities?
If you have the time and expertise, you could invest in lots of funds and manage the portfolio on an ongoing basis, deciding when and how to adjust allocations to one or another. Or you could invest in just two ETFs: one that provides exposure to developed markets and the other to emerging markets. That way, you should have less administrative headaches and perhaps only need to adjust allocations between the two ETFs from time to time. Alternatively, you could invest in just one ETF.
All the world in one simple ETF
An ETF that tracks the performance of the FTSE All-World Index provides immediate exposure to more than 4,000 large and medium-sized companies in 49 developed and emerging market countries across the world. That covers around 86% of the entire global equity market, missing out small companies and those found in frontier markets (economies that are less developed than emerging market countries). The index weights each of those 4,000+ companies by their market-capitalisation, like the FTSE 100 does, so the largest companies have the highest weight in the index.
Investors in a FTSE All-World ETF don’t have to worry about adjusting allocations because it’s all done automatically by the ETF, whenever the index rebalances. This can keep costs down compared to the typical costs incurred if you did it yourself. And speaking of costs, an ETF’s is generally on the low side, with the Invesco FTSE All-World UCITS ETF charging just 0.15% per annum. That makes the Invesco ETF the most cost-effective ETF in the market for worldwide equity exposure.
What to do with your investment
The Invesco FTSE All-World UCITS ETF might be suitable for investors wanting a simple, all-in-one global equity fund. Since most of the hard work happens within the ETF automatically, you should have very little to do on a day-to-day basis. You can choose between having the income generated paid out to you (if you invest in the ETF’s distributing share class) or reinvested back into the ETF (accumulating share class).
Plus, with the world equity markets being covered by your one ETF, you are free to think about adding other types of investment at any time in the future. In the same way that combining many different types of companies from across the globe can provide diversification benefits, so too can combining equities with bonds, commodities or even other more targeted equity exposures.
The choice is yours.
All investing carries risks so please see below for the specific investment risks and important information relating to this ETF.
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Invesco FTSE All-World UCITS ETF | Invesco UK
Investment risks
For complete information on risks, refer to the legal documents. The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.
As a large portion of this fund is invested in less developed countries, investors should be prepared to accept a higher degree of risk than for an ETF that invests only in developed markets. The Fund may be exposed to the risk of the borrower defaulting on its obligation to return the securities at the end of the loan period and of being unable to sell the collateral provided to it if the borrower defaults. The value of equities and equity-related securities can be affected by a number of factors including the activities and results of the issuer and general and regional economic and market conditions. This may result in fluctuations in the value of the Fund. The Fund may use Stock Connect to access China A Shares traded in Mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk.
Important information
Data as at 30 April 2023, unless otherwise stated.
If investors are unsure if this product is suitable for them, they should seek advice from a financial adviser.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment / investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
For more information on our funds and the relevant risks, please refer to the share class-specific Key Information Documents / Key Investor Information Documents (available in local language), the financial statements and the Prospectus, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.ie. The management company may terminate marketing arrangements.
UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back to UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them. For the full objectives and investment policy please consult the current prospectus.
Index: The Invesco FTSE All-World UCITS ETF (the “Fund”) has been developed solely by Invesco. The Fund is not in any way connected to or sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). FTSE Russell is a trading name of certain of the LSE Group companies. All rights in the FTSE All-World Index (the “Index”) vest in the relevant LSE Group company which owns the Index. FTSE®, ICB®, are trade marks of the relevant LSE Group company and are used by any other LSE Group company under license. The Index is calculated by or on behalf of FTSE International Limited or its affiliate, agent or partner. The LSE Group does not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Fund. The LSE Group makes no claim, prediction, warranty or representation either as to the results to be obtained from the Fund or the suitability of the Index for the purpose to which it is being put by Invesco.
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