How Diversified Is Your Global Ex-U.S. ETF?

by on February 6, 2013 | ETFs Mentioned:

Gaining exposure to the global equities market is in itself a daunting task, but with the evolution of the ETF industry, investors can now gain cheap and easy access to nearly every corner of the investable universe through a single ticker. And as these global equity ETFs become more and more popular, issuers are taking it one step further, providing true international exposure without featuring any allocations to domestic securities. The global ex-U.S. strategy is a popular one; investors can add a broad layer of diversification benefits to their portfolios, as international equities can often provide uncorrelated returns to domestic markets [see 10 Questions About ETFs You've Been Too Afraid To Ask].

Investors can now choose from dozens of global ex-U.S. options, including funds that target a particular sector of the international market or those that cast a wider net over the whole space. And though these broad-based funds do feature deep and relatively well-diversified portfolios, a closer look under the hood of some of the more popular products reveals several factors investors should be mindful of.

A Closer Look At Global Ex-U.S. ETFs

While many of the broad-based ETFs do a relatively good job of providing investors with diversified exposure to the international equities market, there are some rather significant differences found among the most popular global ex-U.S. ETFs. First, the interpretation by each issuer of what exactly is the “global market” portfolio; compositions range from a basket of 450 individual holdings to over 6,000. There is, however, a common theme when it comes to allocations to particular sectors and countries; many of these ETFs feature heavy tilts towards the financial services sector and equities from the United Kingdom [see Ex-U.S. ETFdb Portfolio].

The chart below highlights five of the most popular global ex-U.S. ETFs, revealing the differences between the portfolio sizes and allocations to financials and U.K. equities:

  • FTSE All World Ex US ETF (VEU, A)
  • MSCI ACWI ex US Index Fund (ACWX, A-)
  • Total International Stock ETF (VXUS, A+)
  • SPDR S&P World ex-US ETF (GWL, A)
  • FTSE All-World ex-US Small Cap Index ETF (VSS, A)

Though the size of a portfolio does not necessarily dictate the performance of a specific ETF, it is important for investors to realize the differences in the number of holdings in these broad-based products. And while heavy allocations to a specific sector or country are not necessarily harmful, it does mean that the fund’s performance will greatly depend on these two corners of the market.

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Disclosure: No positions at time of writing.