Bought your first global ETF? Here’s how to build from there

Getting started is always the hardest step. That first run, the first time trying to get your car into gear, riding a bike, the list goes on, and investing is no different.

Usually, most people choose a global equity tracker fund to start with, and for good reason. “It’s a great place to start,” AJ Bell’s Head of Investment Research Paul Angell explains. “It gives you exposure to thousands of companies around the world in one investment, and usually at a low cost.”

Indeed, the AJ Bell Investment Team uses them across their Managed Funds range as well. This type of fund is one of the most widely held investments among AJ Bell customers and we have covered in detail the differences and a cost comparison of the most popular options.

The most popular vehicle, the Fidelity Index World Fund, provides exposure to the MSCI World index, encompassing more than 1,300 companies including well-known names like Nvidia, Apple, Microsoft and Amazon.

While this can be a useful foundation for a diversified portfolio, what options do you have to build on that?

How many funds should you own and which ones should you pick?

One of the first tasks is to figure out how many funds you need. AJ Bell’s Paul Angell says three to five funds “may be enough”, for both newer and experienced investors.

“It’s also worth keeping your portfolio manageable. The more funds you own, the harder it can be to stay on top of them,” he adds. Owning too many can add more complexity with limited benefits and more admin.

Once we know how many funds we’re shopping around for, the next thing to decide is what we need. A key pillar of investing, diversification is the principle of ‘don’t put all your eggs in one basket’ with your investments.

By putting your money in different parts of the market you’re able to spread the risk so that when things are performing poorly in one area, you have other options working to positively balance it out.

Take a quick look at the makeup of AJ Bell’s own Managed funds and you’ll see there’s a mix of assets in there for precisely this reason, the breakdown by region and investment type is shown below for the AJ Bell Balanced fund.

As Angell explains, the idea is “to diversify across regions and types of investments while keeping costs competitive”.

AJ Bell customers can access an X-Ray tool which can help give a quick overview of how diversified your portfolio is.

Taking our Fidelity tracker as our foundation, and while it gives exposure to lots of companies, it has a big weighting to the US and in particular, technology stocks, as do most global funds.

So, holding onto the concept of diversifying, Angell says there are three main options available: looking at region, types of investments and adding in some active fund management.

Diversifying by region

As we found out above, you will already have a big exposure to the US so "you could invest in areas such as the UK, Europe, Japan, Asia Pacific or Emerging Markets (EM)”, Angell says.

“This gives you exposure to a wider mix of companies, industries and economic drivers, rather than relying so heavily on US technology shares.”

Sticking with passives and among AJ Bell customers, a popular UK option is the iShares Core FTSE 100 UCITS ETF, which the AJ Bell Investment Team also includes on their Favourite funds list, while the Amundi UK Equity All Cap UCITS ETF and Vanguard FTSE 250 ETF offer broader and mid-cap exposure respectively.

For Europe, Japan, Asia and EM, the AJ Bell Investments team have Vanguard FTSE Developed Europe ex UK ETF, Fidelity Index Japan Fund, HSBC MSCI China UCITS ETF and the iShares Core MSCI EM IMI ETF on their curated list of funds.

Looking for different types of investment

The natural counter to equities is bonds, which are IOUs to governments or companies and are generally seen as being lower risk than shares, although they can still fall in value.

“Adding bonds can help balance a portfolio and reduce its ups and downs,” Angell says.

The Investments team has the Vanguard Global Corporate Bond Index Fund £ Hedged Inc and the HSBC Global Government Bond ETF XCHGBP for some “competitively priced global options” on the Favourite funds list.

You could also go with some ‘alternative assets’, which include things like property or commodities.

If the three main asset classes available to most of us are stocks, bonds and cash you can see alternatives as a useful separate option which can boost diversification, but they wouldn’t typically make up the core part of your portfolio.

The actively managed fund option

The final consideration is to add in some actively managed funds. The global tracker fund we started with and all the options we’ve run through since have been ‘passive’ investments, which means that they simply look to replicate the performance of an underlying group of assets or stock market index.

Active funds cost a bit more, but the rationale is that you’re paying for an expert view and analysis to select a few companies – usually 30-40 – out of the hundreds available that they think will beat the wider market.

Between 1926 and 2019 $47 trillion of wealth was generated for shareholders of US stocks; half of it was generated by just 83 stocks with the remaining 25,500 companies delivering the rest, a study by Baillie Gifford found. Although, particularly in more recent periods, active managers have struggled to outperform.

Active funds are used by some investors alongside their passive options in the hope of achieving better long-term returns, Angell says.

Some of AJ Bell customers favourite global active funds include Baillie Gifford’s Scottish Mortgage Investment Trust and Terry Smith’s Fundsmith Equity, while the Investment Team highlights the Royal London Sustainable Leaders and Fidelity Special Situations as a UK choice.