Bringing you the world in one simple ETF

Watching the Euros 2024 might make you wonder what life must be like for a professional footballer, with millions of people watching you at the Euros … and millions of Euros in your bank account! The Mbappes, Kanes and Ronaldos of the world don’t have too many financial worries, but most of us probably have something to fund for a future expense. That may be something specific like paying off a mortgage or university fees. Or simply to have enough money to be able enjoy retirement.

Whatever your own financial goal is, you’ll need a way to grow your money from what you have now to what you need then. That’s the aim of investing in a nutshell.

The question is how do you do it?

History shows that investing in equities has produced the most successful results over the long term. Equities – or the stocks and shares of publicly traded companies – have produced higher returns than cash, bonds and commodities over the past 5, 10, 15 and 20 years. 

Equities have outperformed other investments over the long term

Past performance does not predict future returns. 

Looking at it another way, using a hypothetical example, if you could have invested €10,000 in the global equities market 20 years ago, your investment might be worth more than €58,000 today. That’s more than three times the amount you would have had from investing in bonds, more than five times as much from commodities or nearly five times as much as if you had kept that €10,000 in a deposit account.

Please note these are hypothetical examples using indices, such as the FTSE All-World Index used as a proxy for global equities. An index is not an investment product and has no fees involved, whereas an investment in an ETF would have fees deducted.

Past performance does not predict future returns.

It’s important to understand that investing in equities is nothing like keeping your money in a savings account at the bank. There are no guarantees, and equities can go down as well as up, especially over shorter periods. Just because a stock performed well last year doesn’t mean it will next year.

That’s where diversification comes in. 

Diversification: assembling a winning team

Think about that star player on your nation’s football team. As talented as he may be, you need plenty of people around him, filling in different positions and possessing different skillsets. History shows that a well-constructed team can help you stay competitive in challenging situations and overcome obstacles when someone isn’t performing well on the day.

It's the same with investing. There are plenty of big ‘star’ companies that grab the headlines. The Apples, Amazons and Nvidias of the stock market may often top the performance league tables, but they too will have their off days. Just look at Tesla. Any company can have a poor sales quarter, fall in demand, change in management, or some other negative news.

When you spread your investment around, you’re increasing the probability of capturing the stocks that do well, and the idea is that they compensate for any that don’t perform as well. Investing in 100 stocks should even out the returns compared to putting all your money into just one stock … and investing in 1,000 should in theory be better than 100. 

Diversification isn’t just about numbers, though. It’s also about differentiation. If you only invest in the stocks of one type of company, let’s say the major supermarkets in the UK or industrial manufacturers in Germany, it doesn’t matter how many you invest in if they all perform the same. If one goes up, they may all go up, and the same on the way down.

Meaningful diversification requires investing in different types of companies, of different sizes, and from different parts of the world. Every country goes through cycles, where its economy expands for a period of time and then eventually contracts … then recovers to begin another expansion phase.

Some companies tend to perform better than others during certain phases of the cycle. For instance, people tend to spend more on travel and other luxury goods and services when their economy is booming. But when conditions get tough, people will cut back on lavish goods so they can pay for basic necessities … like food.

Even the most successful companies go through lean periods when customers can’t afford to buy their products. That’s why you want to invest in a wide variety of companies that are selling their products to a wide range of customers around the world. While countries tend to go through similar economic cycles, the timing and length of each phase often differs from one country to the next.

That’s good news from a diversification perspective because difference is your friend.

Combining developed and emerging market opportunities

When you invest in companies from across the world, you’re gaining exposure to large household names, often from the more established western economies. Many of these are your solid defensive players. These companies can be more resilient to economic downturns as they tend to have diversified businesses and broad customer bases.

You’re also gaining exposure to younger companies with potential to grow faster than more mature businesses. Many are involved in new technologies and other high growth areas of the market. While some of the companies are in developed economies, many are found in emerging markets.   

Companies in developing regions of the world are also well-positioned to capitalise on the growth opportunities available as those countries evolve. This can often include catering for the needs of a domestic population as it becomes wealthier and healthier. 

By combining companies from developed and emerging market countries, you’re effectively getting the best of both worlds.    

Simple, with no maintenance required

How could you possibly buy all the stocks in the world or even a large proportion of them? And if you could, how would you manage such an enormous portfolio?

One way would be to buy and hold different funds that each invest in the stocks of certain countries or regions. However, you would still have to select the funds, manage the allocation to each one and deal with the administration.

A more efficient way would be to invest in an ETF that tracks the FTSE All-World Index. With one simple investment, you would instantly gain exposure to more than 4,000 stocks from 49 countries, covering 86% of the investible universe. The index includes large and medium-sized companies. Everything is taken care of automatically within that one simple ETF.

An ETF is an Exchange-Traded Fund, which as you might guess is an investment fund that is traded on a stock exchange in the same way as ordinary stocks and shares. You can invest in an ETF through most online investment platforms or trading apps. And ETFs tend to have low costs.  

Investing at the lowest cost possible

Most everyone will agree that paying lower costs for something is a good thing. But what could that really mean for your investment and achieving your financial objectives?

While there are no guarantees about the future performance of the stock market, the impact of an ETF’s cost is easier to see. One reason ETFs are attractive is because of their transparency, including how much they cost (which is typically on the low side). The ETF’s ongoing charge figure, or OCF, is the percentage fee deducted from the ETF to cover the costs of running the fund. 

Here, we see the actual performance of the FTSE All-World index over the past 20 years and hypothetical returns of ETFs tracking the index, assuming different levels of fees. This is simply meant to illustrate the point, showing ETFs with annual fees of 1%, 0.5%, 0.22% and 0.15%. 

The OCF is an annual percentage deducted daily on a pro rata basis. That means the impact is often negligible over short time periods. But over the longer term, even a small difference in the OCF can make a big difference to the overall performance of your investment.

The above chart is a hypothetical example for the purposes of illustrating a point. It shows a hypothetical investment of €10,000 invested over a 20 year period, with different fee rates applied. For example, a 1% annual fee reduced the final investment pot by more than €13,000 while a 0.15% fee reduced it by only €2,200.

That’s why it makes sense to choose an ETF with low fees. After all, it’s your money you’re investing. You should be able to keep as much of it as possible.