Or, more specifically, is CSPX (representing the S&P 500) or VWRA (representing the FTSE All-World index) better?
If you’re thinking about investing in global ETFs, this dilemma is probably no stranger to you.
So, how do they compare with each other?
Is one better than the other?
In this post, I’ll take a closer look at the similarities and differences between CSPX and VWRA and tell you which ETF I picked.
These 2 ETFs are arguably the most popular S&P 500 and World ETFs in Singapore, which is why we’re looking at them specifically.
First, let’s go over some background information about the 2 indices/ETFs in question.
CSPX – iShares Core S&P 500 ETF
CSPX is an Ireland-domiciled ETF that tracks the S&P 500 index.
The S&P 500 index tracks the performance of 500 of the top US large-cap stocks.
So investing in CSPX is akin to investing in large-cap US stocks.
CSPX is denominated in USD and is an Accumulating (Acc) ETF.
VWRA – FTSE All-World ETF
VWRA is an Ireland-domiciled ETF that tracks the FTSE All-World index.
This index tracks the performance of large- and mid-cap stocks from developed and emerging markets around the world.
So investing in VWRA is akin to investing in large- and mid-cap stocks from many different countries.
VRWA is denominated in USD and is an Acc ETF.
Since CSPX and VWRA track different indices, there are bound to be undeniable differences between them.
Market capitalisation, or market cap, refers to the market value of a company, measured by the share price of its stock multiplied by the number of shares outstanding.
CSPX covers only large-cap stocks while VWRA covers both large- and mid-cap stocks.
But what does this difference mean?
For one, this makes VWRA more diversified.
Next, it’s a general consensus that large-cap stocks are more stable and are therefore safer investments than mid- or small-cap stocks.
However, the potential upside for large-cap stocks is generally lower than mid-cap stocks.
So, based on market cap, VWRA is riskier than CSPX, but also offers higher potential returns.
Market classification is an indication of a country’s economic development and accessibility of its markets.
CSPX covers only developed markets, specifically the US, while VWRA covers developed markets like the US and UK and emerging markets like China and Brazil.
The implications of this difference are similar to those arising from a difference in market cap.
Again, VWRA is more diversified than CSPX in terms of market exposure.
Developed markets are generally more economically stable than emerging markets and are more likely to experience steady growth.
This makes investments in developed markets safer.
And since emerging markets have more room for economic growth, there are higher potential returns from investing in them.
Based on market cap, VWRA is again riskier than CSPX but offers higher potential returns.
The differences in sector allocation are due to the difference in holdings of the underlying indices.
While the exact allocation %s are different, the breakdown is largely similar, so I don’t think there are significant implications arising from this difference.
The differences in geographical allocation are due to the underlying indices being different.
There is an obvious difference here where CSPX has almost all its holdings based in the US while VWRA has holdings in many different countries.
VWRA is thus more diversified than CSPX and less dependent on the US economy.
In this aspect, CSPX is riskier than VWRA because its performance and stability are solely dependent on the US economy.
However, it’s worth noting that VWRA still has a significant portion of its portfolio allocated to the US at ~60% and is also heavily impacted by the US economy.
The expense ratio is the fee imposed by fund managers for managing the ETF.
Generally, expense ratios decrease as the fund size of the ETF increases.
Since CSPX has a larger fund size of 55 billion compared to VWRA’s 13 billion, CSPX has a lower expense ratio.
The expense ratio is an unavoidable cost of investing that eats into our returns.
Given that 2 ETFs have similar performance, an ETF with a lower expense ratio is likely to produce higher net returns.
Now that we’ve gotten major differences out of the way, let’s also look at some ways that CSPX and VWRA are similar.
For one, both CSPX and VWRA are denominated in USD.
This means that regardless of which you choose to invest in, you’re exposed to similar forex risks.
Country Of Domicile
Next, CSPX and VWRA are both domiciled in Ireland while being traded on the London Stock Exchange (LSE).
Ireland-domiciled ETFs are known to be advantageous due to their tax treaties with several different countries, resulting in tax savings for investors.
In particular, Ireland-domiciled ETFs help to reduce the dividend withholding tax that Singaporeans are liable for on US-listed investments from 30% to 15%.
For more information about withholding tax, you can check out my ETF guide.
Since both CSPX and VWRA are domiciled in Ireland, both ETFs are able to give us this benefit.
Furthermore, since both ETFs are traded on the LSE, any broker costs for investing in them will be similar for a given broker.
Finally, both CSPX and VWRA are Acc ETFs.
This means they are equally efficient in terms of reinvesting dividends and this is part of what makes them popular ETFs for investors looking to accumulate long-term wealth.
To learn more about Acc ETFs, you can check out this post.
Now, let’s compare the performance of the S&P 500 and FTSE All-World indices.
The S&P 500 returned an average annual return of 11.14% from Feb 1992 – Dec 2021 (source).
The FTSE All-World returned an average annual return of 9.45% from Mar 2005 – Sep 2021 (source).
A more accurate comparison of their performance over the same period (Mar 2005 – Sep 2021) is shown below.
The S&P 500’s average annual return during this period is 11.21%.
We can see that historically, the S&P 500 has outperformed the FTSE All-World index.
The US, being at the heart of the technological boom in the 21st century, experienced massive economic growth over the past 2 decades.
This is likely what contributed to the outsized performance of its economy compared to the rest of the world.
And this is further reflected in the performance of the S&P 500 index compared to a world index like FTSE All-World.
However, it’s important to note that historical performance is not representative of future performance.
So there’s no guarantee that the S&P 500 will continue to outperform the FTSE All-World index in the future.
The future, relative performance of these 2 indices will depend on whether or not the US will continue to be the leader in global economic development in the years to come.
It’s also interesting to note that while the performance of both indices is different, their behaviour is almost identical.
They move almost perfectly in tandem with each other, suggesting that they are highly correlated.
This should be expected, given that FTSE All-World has ~60% portfolio allocation in the US and invests in similar assets as S&P 500.
This tells us that CSPX and VWRA aren’t all that different.
My Pick: CSPX
If you’ve been on my blog for a while, you’re probably not too surprised to see that CSPX is my final pick.
But let me explain why.
The biggest reason for CSPX being my final pick is due to its lower cost of investment.
That is its lower expense ratio of 0.07% vs VWRA’s 0.22%.
As mentioned above, the expense ratio of an ETF is an unavoidable cost of investing, and minimising this cost gives me the best chance of maximising returns.
What do I mean by that?
I don’t know for certain whether CSPX or VWRA will generate higher gross returns over the next few years or decades.
No one does.
But what I do know for a fact is that it costs less to invest in CSPX than in VWRA – 68% less, to be exact.
I can, therefore, maximise my net returns by minimising my cost of investing.
Of course, this is true only as long as VWRA doesn’t outperform CSPX by >0.15%.
But again, it’s not possible to know each ETF’s future performance.
Picking the ETF with the lower expense ratio gives me the best chance of maximising returns, especially since I have no reason to believe that one will outperform the other.
0.15% may sound like a small amount, and it is.
But don’t forget that with compounding, small % differences in performance can result in large actual differences, especially if the capital is large.
Next, even though past performance is not indicative of future performance, I do think that the US will continue to lead global economic growth – at least, in the short term.
Other developed markets simply don’t have the market size to compete with the US, which limits their potential in terms of leading global economic growth.
Below is a table of the world’s largest markets by GDP (gross domestic product), which is a common indicator of economic development.
|Country||Nominal GDP (USD, trillions)|
And in terms of % share of the global economy, the breakdown looks like this.
The next biggest developed market after the US is Japan, which currently has only 25% of the market size of the US.
What about China?
There's no doubt that China is a rising super nation that will be more than capable of competing with the US.
But investing in VWRA only presents a ~4% exposure to China's economy, which is quite little for such a large market.
If I really want to invest in China's market, I believe I'm better off doing so with a China ETF rather than doing so via VWRA.
The most common argument for VWRA over CSPX is its inclusion of mid-cap stocks and other developed and emerging markets on top of US large-cap stocks.
And for this added diversification, some people are willing to pay the 0.15% premium in expense ratio.
While there's nothing wrong with that, I have my reservations as to how valuable this portfolio diversification really is.
With all that's been said, CSPX is the obvious pick to me.
The question of CSPX vs VWRA - or S&P 500 vs World index - is a dilemma that many investors face.
It's hard to say if 1 is better than the other because it boils down to the individual investor's investing belief.
Personally, I prefer CSPX primarily because of its lower expense ratio.
But it's also because I'm not convinced that the diversification that VWRA brings is necessarily beneficial.
Obviously, people who are convinced of this benefit would disagree and may prefer VWRA over CSPX.
But one thing I think everyone can agree on is that both CSPX and VWRA are great ETFs to own in your portfolio especially if you're looking to build long-term wealth.
While there are some differences between the 2, they aren't all that different because they are strongly correlated.
Regardless of which ETF you choose, it's a step in the right direction to building a rich future.
Which ETF do you prefer? Why? Let me know in the comments below!