S&P 500 vs. World ETF: Which Strategy Is Better?

Summary

In this video, the speaker compares the S&P 500 ETF with World ETFs (MSCI World and FTSE All-World), focusing on factors like historical performance, fees, diversification, and long-term risk. While the S&P 500 has historically outperformed globally diversified indices, the speaker warns against relying solely on US stocks due to the risk of underperformance and future market shifts. Global ETFs offer broader diversification, which can be beneficial for long-term stability. Ultimately, the decision depends on individual risk tolerance and investment goals, with the speaker advocating for simplicity and global diversification in their personal strategy.

Takeaways

• 😀 The S&P 500 consists of the 500 largest U.S. companies, while the MSCI World covers 1,400 large and mid-cap stocks from 23 developed countries, and the FTSE All-World includes over 4,200 stocks from 49 countries, including emerging markets.
• 😀 The S&P 500 has historically outperformed global ETFs, with a compound annual growth rate of 10.98% over the last 32 years, compared to 8.53% for the MSCI World and 8.8% for the All-Country World.
• 😀 U.S. stocks have outperformed global stocks over the past decade, especially in the tech sector, but global ETFs have had periods of stronger performance, including stretches of up to 40 years.
• 😀 The S&P 500 tends to outperform U.S. and global indexes during certain periods, but there have been multiple times in history (e.g., 1970-2011) when the MSCI World outperformed the U.S. market significantly.
• 😀 One of the benefits of the S&P 500 is its extremely low fees (0.03% per year), which is significantly lower than the fees for global ETFs, which generally range from 0.12% to 0.15% annually.
• 😀 Global ETFs offer more diversification than the S&P 500, reducing the risk of being overly dependent on the U.S. stock market, especially given the uncertainty of where the next big innovative companies will emerge.
• 😀 There is no way to predict whether U.S. stocks will continue to outperform in the future, and a global ETF offers insurance in case other regions (like India or Europe) outperform the U.S. in coming decades.
• 😀 Historically, U.S. stocks have seen periods of underperformance compared to global stocks, emphasizing the importance of diversification and not betting everything on U.S. equities.
• 😀 The author prefers investing in a global ETF (Invesco FTSE All-World) to capture stocks from all developed and emerging markets, believing that it provides a better long-term strategy than focusing on a single country or region.
• 😀 The author encourages long-term, diversified investing through ETFs, using a strategy that doesn't rely on short-term predictions but aims for steady growth over time by owning a broad selection of global stocks.

Q & A

Why might someone choose an S&P 500 ETF over a world ETF?

The S&P 500 ETF is attractive due to its low fees (as low as 0.03%) and its strong historical performance, particularly driven by the U.S. stock market's dominance in recent years. Many investors prefer it for its simplicity and past outperformance compared to global ETFs.

What are the main differences between the S&P 500, MSCI World, and FTSE All-World indices?

The S&P 500 includes the 500 largest U.S. companies. The MSCI World index covers around 1,400 large and mid-cap companies from 23 developed countries. The FTSE All-World includes around 4,200 stocks from 49 countries, covering both developed and emerging markets, making it the most diversified of the three.

How have the returns of the S&P 500 compared to global indices over the past 32 years?

Over the past 32 years (from February 1992 to September 2024), the S&P 500 has outperformed both the MSCI World (8.53% annual return) and the FTSE All-World (8.8% annual return) with a 10.98% annual return. However, there were periods where global indices outperformed the S&P 500.

What are some of the long-term historical trends when comparing the S&P 500 to global indices?

Historically, there have been extended periods, even up to 40 years, where global indices such as the MSCI World outperformed the S&P 500. For instance, between 1970 and 2011, the U.S. stock market underperformed the MSCI World, only gaining momentum after 2011.

What is the downside of investing only in the S&P 500?

The main risk of focusing solely on the S&P 500 is that it concentrates your investments in U.S. stocks. If U.S. stocks underperform relative to global markets, you could miss out on potential growth from other regions, such as emerging markets or Europe.

How does diversification through global ETFs provide an advantage over S&P 500-only investments?

Global ETFs provide broader diversification by including stocks from multiple countries and regions. This reduces the risk associated with concentrating investments in one market and offers a hedge against potential downturns in the U.S. economy. The inclusion of emerging markets also provides additional growth opportunities.

What does recency bias mean in the context of investment decisions?

Recency bias refers to the tendency of investors to place more importance on recent performance, which can lead to overvaluing current trends. For example, after the strong performance of U.S. stocks over the past decade, many investors may be inclined to focus solely on the S&P 500, ignoring the possibility of future global outperformance.

What is the author's personal investment strategy?

The author prefers simplicity in investment and chooses a global ETF that covers both developed and emerging markets, specifically the Invesco FTSE All-World ETF. This strategy aligns with the author's long-term goals and aims to avoid focusing on a single country or market.

Why does the author prefer a world ETF despite slightly higher fees?

The author values the diversification that a world ETF offers, which reduces the risk of investing in only one market, such as the U.S. With the added exposure to emerging markets and developed economies globally, the author feels more secure, even with slightly higher fees.

What are the recommended ETFs for someone considering a world ETF investment?

The author recommends the Invesco FTSE All-World ETF for broad exposure to global markets, including emerging markets. Other options include the Spider MSCI All-Country World ETF and the Spider MSCI World ETFs for those looking to focus on developed markets or the broader global economy.