Explaining the difference between the most popular global tracker funds

Global tracker funds and ETFs are one of the most popular ways for investors to gain access to the market.

These passive instruments track an underlying index. Tracking refers to the strategy of building an investment portfolio designed to mimic rather than beat the performance of a specific market, giving exposure to all the companies in that index.

This blanket approach allows them to be low-cost versus an active fund where you pay a higher fee to access a fund manager’s skills, process and expertise of picking and choosing just a handful of companies they think will beat the benchmark.

On the surface, all global passive portfolios may appear to be extremely similar, but once you dig a little deeper, you quickly realise that they vary not only in costs, but in their regional and sector exposure, leading to a range of returns.

Looking at the most popular global trackers among AJ Bell customers, we can help shed some light on what they're actually buying.

First key difference: structure

A key difference between tracker funds and ETFs is how they’re structured.

When buying or selling an index fund, the price is based on the total value of all securities held within the fund, also known as the net asset value (NAV), and you’re only able to trade them once a day.

ETFs on the other hand are listed on the stock exchange just like shares in a company and are bought and sold the same way, meaning you can buy them at any time, but the price will fluctuate depending on the intra-day moves.

FTSE, MSCI, S&P: what’s the difference?

When looking at the names of different products you can get a lot of key information about what benchmark you’re buying exposure to up top and who built it.

The major index providers are MSCI and FTSE, which are relevant to many of the popular passive funds here, along with S&P and Solactive.

MSCI and FTSE are the two biggest players in creating broad global benchmarks, meanwhile S&P is known for US indices, and Solactive is a German-based firm best-known for creating bespoke indices specialising in ESG and thematics, and for offering lower costs than its more established rivals.

‘Global’ means different things in different benchmarks

Let’s take the most popular ETF among AJ Bell customers, the Vanguard FTSE All World ETF, and the most popular fund, the Fidelity Index World, which both track different benchmarks.

The Vanguard ETF tracks the FTSE All-World index while the Fidelity fund tracks the MSCI World index.

Both indices are market-capitalisation weighted, meaning larger companies have a bigger representation and thereby greater impact on the performance of the index, meanwhile smaller companies have less of an influence.

This is the general formula for global trackers and is the reason why the US makes up such a big part of these portfolios.

The Magnificent 7 - Meta, Alphabet, Amazon, Apple, Microsoft, Nvidia and Tesla - boast market caps in the hundreds of billions and even trillions, which means they account for a significant chunk of all global indices on their own.

Going back to the FTSE All World and MSCI World benchmarks, both focus on large and mid-caps but have a different interpretation of what ‘world’ is.  

MSCI World only includes developed markets meanwhile the FTSE All World encompasses both developed and emerging markets. The FTSE equivalent of the MSCI World is FTSE Developed and the MSCI index which capture both developed and emerging markets is the MSCI All Country World Index (ACWI for short).

In fact, FTSE and MSCI as providers have a different approach to their emerging market classifications, with the former ranking South Korea as a developed market, whereas MSCI puts it in the emerging market category.

Not including emerging market means that the MSCI World misses out on one of the biggest companies in the world, Taiwan Semiconductor Manufacturing Company, and has no exposure to China.

This varied make-up of the benchmarks contributes to a different set of total returns for the funds tracking them over the years.

Over five years, the Fidelity Index World made 87% tracking the MSCI World index, meanwhile the Vanguard option made 80%. Over three years they both made 57% but near term, when the US has been struggling and emerging markets have rallied that exposure has pushed the Vanguard tracker ahead of the Fidelity fund, making 17.5% versus 15%.

All the funds in this analysis have a similar level of nuance which requires investors to thoroughly check what exposure they’re actually getting even if they all appear to cover a broad global basket of stocks.

For example, nine of the 10 funds track indices made up of thousands of companies. The L&G Global 100 Index Trust gives, as its name suggests, the narrowest portfolio exposure across the group.

Investing in the 100 biggest public companies this makes it highly concentrated in the US which has driven its outperformance against peers thanks to the Mag 7, US tech trade.

Meanwhile, the Vanguard FTSE Developed World ex-UK Equity Index focuses on everything the aforementioned Vanguard World fund does but excludes the UK and emerging markets.

According to Vanguard, this fund is specially designed to help investors benchmark their international investments, meaning that they may want some global exposure but want their UK element to come from an active fund or, don’t want any at all.

If you’d taken that route, you’d have bested the Fidelity Index World fund and Vanguard All World ETF over three and five years and maintained a strong comparative performance near term.

Fees are competitive but there is some variation

Because they are passive products, all of these portfolios offer lower ongoing charges relative to actively managed funds. The 10 trackers highlighted had average charges of 0.16% but ranged from 0.19% to as low as 0.12%.