There are many different approaches as far as investing into the stock market via ETFs is concerned. I can’t blame you for feeling overwhelmed, especially if you’re still at the start of your investment journey. 6 years ago, I felt the exact same, especially since so much of the English speaking content around investing in stocks is tailored towards US based investors, a lot of which isn’t that useful to us Europeans.
That’s why today I want to go over some of the most popular ETF portfolio strategies, from extremely simple to more complex. I’m hoping that this video helps you figure out which approach might work best for you. I’m going to include the ISIN numbers or ticker symbols for any ETF I mention either in the video itself or the description below, so that you can easily find it using your favorite broker.
Speaking of that, you can find my personal favorite low-cost brokers in Europe linked down below as well, which is one way you can support me - in addition to subscribing of course, so you don’t miss any upcoming finance videos exclusively for Europeans. So, before we take a look at the different portfolios, I want to give you the tools I often use for my own research to find and compare the best ETFs that are actually available to investors in Europe. One of the most common questions I still get to this day is someone asking about a specific ETF they heard about on an American investment channel or blog and why they’re not able to buy it using their broker.
Well, because of EU regulations, we’re not able to trade US-based ETFs. But, this doesn’t mean we can’t invest into the same index containing the exact same stocks, we simply have to find an ETF that’s domiciled in Europe instead. Just to give you a quick example - while you can’t buy the Vanguard S&P 500 ETF with the ticker VOO, you can still invest into the same index via the same provider, Vanguard with the ticker symbol VUSA.
The only relevant difference is, this one is based in Ireland instead of the US and you can buy or sell it directly in euros instead of USD, so you don’t need to waste any money converting your currency. Now, one of my favorite tools to find the best ETFs and compare their performance is JustETF. Here you’ll also be able to see each ETFs ISIN number at the top or ticker symbol at the bottom, which you need to find it using your favorite brokerage account.
Another useful tool if you want to quickly find the largest ETFs by net asset value or sort by dividend yield is Interactive Broker’s GlobalAnalyst, just make sure you select Europe as a region and Euro as a currency beforehand to find ETFs you can buy. You can then find a lot more information when searching for it within your Interactive Brokers account and hitting the research tab. And if you enjoy testing a specific strategy, at least as far as data from the past is concerned, the last useful site I need to mention is Backtest by Curvo.
Here you can create a portfolio and see how it performed over a specific period. For example, did you know that a theoretical 10. 000€ investment in the MSCI World index in December 1978 would have turned into 836.
000€ by February 2023. Or that a recurring investment of 1. 000€ every month since then would have turned into 6,3 million euros?
That’s the power of compound interest over long time periods. It also helps to put things in perspective when the market is down, as the last 12 months have certainly not been easy. Alright, let’s now get to the different ETF Portfolios, from extremely simple to more complex.
It’s up to you to choose between the distributing version of an ETF, so the version where you receive regular dividend distributions paid out to your account or the accumulating version, where the ETF itself automatically reinvests those for you into more shares of the stocks within the index. If you’re not sure about which one to pick, maybe this video of mine will help you make that decision. I will also only mention ETFs that physically hold the stocks within the index, not synthetic ones that simply track the index performance via SWAP contracts, as those carry additional counterparty risk.
Having said that, this brings me to Portfolio #1, the easy peasy 1-ETF portfolio covering the entire world, not just developed markets, but emerging markets like India and China as well. There are two indexes that in my opinion are best suited for this strategy: The FTSE All-World and the MSCI ACWI index. Among them, the FTSE All-World is a bit more diversified, covering 30% more stocks, 3.
733 vs. 2882. And it’s your only choice if you’re looking for a distributing ETF, for those of you that enjoy having dividends paid out to your account on a regular basis, which I won’t lie, can be quite motivating.
When looking at the best ETFs for a simple, global 1-ETF portfolio based on performance, total expense ratio and size, these are my picks. The Vanguard FTSE All-World either as a Distributing or Accumulating version and the accumulating iShares MSCI all country world. They have been pretty close to each other in performance over the past 11 years.
Whichever ETF you end up choosing for this strategy, you’re ensuring that you’re invested into all of the best publicly listed companies from around the world based on their market cap, no matter if they come out of the US, Europe or India in a few years. Basically what you’re doing is you’re letting the market itself decide over time how much is allocated in stocks from developed markets (right now that’s about 89%) and emerging markets (around 11% right now). This for me, is the simplest way to invest into ETFs and I believe this is the strategy you’re the least likely to want to change in a few years, a decade or more.
Because the main thing you should keep in mind is that ETFs are long-term investments, you should have a time horizon of at least 5 years, ideally 10 years or more. You don’t want to put yourself in a position where you’re constantly questioning your decision and flip-flopping from strategy to strategy. That would most likely not only cost you returns due to more trading fees and taxes, but your peace of mind as well.
Now you might be wondering - wait a second, what about the MSCI World? Well, MSCI World ETFs actually only contain developed markets, not the entire world. This means you’re completely excluding major emerging economies like China, India, Taiwan, Indonesia and Brazil from your investments.
If you’re doing that on purpose that is perfectly fine, you should simply be aware of how you’re investing. This brings me to the two most popular alternatives to the global 1-ETF portfolio I just mentioned: The first alternative is just investing in the MSCI World or FTSE Developed World index. You’ll still be investing globally, but just into developed markets.
Once again, the FTSE Developed World index is broader, containing 2. 200 stocks from 26 developed markets compared to only 1. 508 stocks from 23 developed markets in the MSCI World.
This also explains the slight performance difference between the two over the past 3 years, when comparing what I believe to be the best 6 ETFs for this strategy, either as an accumulating or distributing version. Just a quick reminder, you can find the ticker symbol for each ETF I mention today in the video description and the pinned comment. The second alternative to the 1-ETF portfolio is another very popular index the S&P 500, covering the top 500 large cap stocks in the United States of America.
It’s probably the one you’ll hear mentioned the most often if you consume finance content from American sources. Some of you commenting under my videos even argued that the rest of the world is highly correlated to the US market anyway, so why not just buy the S&P 500 directly? You can certainly do that if you want - I’ll just tell you my own issue with this approach.
By only buying the S&P 500 you’re concentrating your investment on stocks from a single country and placing a bet that these are going to do better than the rest of the world. While that may have been the case over the past few decades on average, nobody knows what the future holds. How confident are you that US stocks will keep outperforming long-term and that you won’t want to change your investment strategy in a few years if you see more innovation coming from other countries?
You should also know that US stocks already make up about 59-60% of the FTSE All-World and MSCI ACWI and 65-67% of the FTSE Developed World and MSCI World index respectively on a market cap basis. That’s already a lot. So if the US keeps performing the best you’ll be seeing most of that reflected in globally diversified ETFs as well, while still ensuring that you don’t have any regrets if other regions end up with a higher performance long-term.
Again, I just wanted to make sure you understand exactly what you’re betting on - as long as you’re aware of that, that’s perfectly fine. If that’s the case, here are the 4 S&P 500 ETFs I would pick based on my research. This finally brings me to portfolio #2.
Now we’re adding a bit more complexity to our ETF investments. Here you’re again investing into stocks from the entire world, but this time via 2 ETFs - 1 for developed markets and one for emerging markets. This means, you have to make an active decision regarding your allocation to each of them and ideally, rebalance your portfolio to your target allocation on a regular basis.
For developed markets your best options are once again ETFs covering the FTSE Developed World or MSCI World, while for Emerging Markets you have the FTSE Emerging Markets and MSCI Emerging Markets index. Surprisingly, the 70/30 split has gotten quite popular in the German finance community. The reason investors give for that approach is that Emerging Markets already account for 50% of global GDP, while stocks from Emerging Markets only make up 10,5% of a global index based on market cap.
So by giving them a weighting of 30%, you’re getting closer to their weight by GDP. It’s perfectly fine if you wish to do that, but my issue with this thought process is that in my opinion you’re placing too much importance on where companies are based, which is only part of the story. For example, US stocks generate 40% of their revenue in other countries, including emerging markets and with IT companies this number is even higher, at 58%.
So I’m not a big fan of over-weighing stocks simply based on their country’s GDP, certainly not by a factor of 3x compared to their market cap. I think my own limit would be an 80/20 split between developed and emerging, but to each their own. When choosing ETFs for this strategy, I would stick to one index provider - either FTSE or MSCI, so that you don’t have any countries overlapping in your portfolio.
For example, South Korea and Poland are present in the FTSE Developed World, while they’re still classified as Emerging Markets by MSCI. So I would pick either these Developed World plus Emerging Markets ETFs by Vanguard or these MSCI World and Emerging Markets ETFs. The iShares Emerging Markets IMI ETF I selected here even includes Small Cap stocks, adding a bit of extra diversification.
Next we have portfolio #3. What if you want to invest into smaller companies, also known as Small Cap stocks as well? These are generally riskier and more volatile, but they have historically outperformed large and mid cap stocks over long time horizons, although there’s no guarantee that’s always going to be the case.
There is actually a global ETF that accomplishes this within a single ETF, the MSCI ACWI IMI ETF by SPDR. My only issue is that it’s relatively small with a fund size of 461 million euros and that while its parent index is very broad with 9. 123 stocks, the ETF itself actually only holds 1.
864, so about 20% of them. It’s also a bit more expensive with a total expense ratio of 0,4% per year and it only exists in an accumulating version, in case you prefer distributing ETFs. ** Still, I think you could do a lot worse if you wanted a simple all in 1 solution including Small Cap stocks.
As for my personal preference, I would simply add a 10-15% allocation in the MSCI World Small Cap index to a global ETF (for example the Vanguard FTSE All-World) from portfolio #1. I would pick the iShares MSCI World Small Cap ETF to do that. This brings me to portfolio #4, that’s for anyone looking to increase the percentage of European stocks in their portfolio, since Europe’s share by market cap in global ETFs has decreased a lot over the past decade and currently stands at only 16,8%.
One way to achieve that is by adding one of these 3 indexes to a global ETF: The Stoxx Europe 600 - Covering 600 large, mid and small cap stocks, the FTSE Developed Europe - which contains 585 large and mid cap stocks or the MSCI Europe Small Cap, covering over 980 Small Cap stocks in Europe. The last option could be interesting if you were considering to add Small Cap stocks to your portfolio in the first place but you also wanted to increase how much you have in European companies. With an 80/20 allocation to the FTSE All-World and a Europe ETF, you’d be able to reduce your exposure to the US from 58,5% to 46,8% and to double your exposure to European stocks from 16,8% to 33,4% based on their current market cap.
This percentage is of course not locked in, it changes over time based on how stocks from each country perform in the FTSE All-World. These are the ETFs I would pick to add more European stocks to my portfolio, as either a distributing or accumulating version. Once again, the ticker symbols are in the video description and the pinned comment.
Now, what if you particularly value regular dividend payments from your investments in ETFs? And what if once a quarter, as is the case with most Vanguard ETFs is not often enough for you? This brings me to Portfolio #5, the Dividend Income portfolio.
Here’s the thing - most high dividend yield ETFs are complete garbage. What’s the point of a high dividend yield if the total performance (so the ETF share value plus paid out dividends) underperforms the market by a significant margin? That’s why I’m not a fan of most of them, including the Vanguard FTSE All-World High Dividend Yield index.
Here’s how that one did compared to the default index since March 2008. Keep in mind, this is including last year, where dividend stocks actually performed better. As a result, I would still pick the distributing Vanguard FTSE All-World from portfolio #1 over the high dividend yield version as the first ETF and a dividend focused ETF I actually do like, the Fidelity Global Quality Income.
This one even outperformed my standard FTSE All-World ETF since 2017. By combining these two, we’re receiving dividend distributions in 8 out of 12 months: In March, June, September and December from Vanguard and in February, May, August and November from Fidelity. If I had to choose, I would go with an 80/20 split between the two, since the Global Quality Income ETF is still quite a bit smaller and more concentrated compared to the FTSE All-World.
And if you want to specifically add additional REITs or real estate companies over what’s already in the FTSE All-World index, one option that could fit in well with our Dividend Income Portfolio is the HSBC FTSE EPRA NAREIT Developed ETF: As luck would have it, it pays out dividends in exactly the 4 months that were missing from the other two ETFs - January, April, July and October. This index was actually neck and neck with the FTSE All-World since 2005, but hasn’t quite recovered from the Covid crash yet, also due to the restrictive monetary policy over the past 12 months. It could be a good addition if you’re looking for more exposure to real estate, another source of dividends or betting on a turnaround in interest rates.
So here’s option #2 for the income portfolio: 70% Vanguard FTSE All-World as a solid, broadly diversified base, 20% Fidelity Global Quality Income and 10% in the HSBC FTSE EPRA NAREIT Developed ETF. Last but not least, we have portfolio #6, the most complex one by far. Here you’re again investing globally, but you have full control over how much you allocate to each region via 5 ETFs.
The FTSE North America, FTSE Developed Europe, FTSE Pacific ex Japan, FTSE Japan and the FTSE Emerging Markets. And this right here could be a sample allocation to each, so you don’t over-complicate things. The advantage of this portfolio is that you’re very flexible in that you can always see and change how much of your money is invested in each region.
The downside is obviously its complexity compared to a one or 2 ETF solution. And this completes the 6 ETF Portfolios I wanted to show you today. Once again, you can find all of their ticker symbols down in the description below, in addition to what I consider to be the best low-cost brokers in Europe, where you can buy them.
Now you might be wondering - wait a second Angelo, what about bonds? Personally, I’m not a fan of bonds, even though they finally started to pay more interest. I prefer having that part of my portfolio instantly accessible in cash and without fluctuations in value, I mean just look at what happened last year!
As a result, I’m currently keeping my cash reserves with Trade Republic, where I’m getting 2% interest per year, paid out monthly and secured by a deposit guarantee of 100. 000€. And in addition to that, I already have 10-15% of my portfolio on different P2P lending platforms, where I’m willing to take more risk for significantly higher interest payments than what bonds have to offer.
As for which ETF strategy is is right for you, you ultimately need to figure that out for yourself. Hopefully I was able to give you some ideas to start from. Regarding my own investment journey, I actually started with a total of 6 ETFs in 2017 - one for each region, before changing it as I realized that I preferred a simpler and less time-intensive solution for my investments in the stock market.
That’s why my personal preference is portfolio #1, the easy-peasy 1-ETF portfolio covering the entire world, using the Vanguard FTSE All-World ETF. But that’s just me and there’s absolutely nothing wrong with choosing a different strategy! Actually, let me know in the comments - which one of these ETF portfolios would you pick if you had to choose?
Before you take off, don’t forget to subscribe for more videos specifically for European investors and if you’d like to support me, feel free to use my links in the description below, which is also where you’ll be able to find all the ETFs I mentioned today. Thank you guys so much for watching, have a wonderful day and until next time!
