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IWDA vs VWRA – Are There Significant Performance Differences Between the Two Low-Cost ETFs?

There are two exchange-traded funds that passive investors are considering for their long term wealth accumulation.

  1. The iShares Core MSCI World UCITS ETF – Ticker IWDA – Listed on the London Stock Exchange
    • Benchmark Index: MSCI World Index (1,613 equity holdings)
    • Accumulating
    • USD
    • Total Expense Ratio: 0.20%
  2. The Vanguard FTSE All-World UCITS ETF – Ticker VWRA – Listed on the London Stock Exchange
    • Benchmark Index: FTSE All-World Index (3,416 equity holdings)
    • Accumulating
    • USD
    • Total Expense Ratio: 0.22%

Both are UCITS funds, domiciled in Ireland so they are more tax-efficient in terms of dividend withholding taxes and for retail investors, you have less estate duty/inheritance tax issues.

VWRA is the new kid on the block. It debuted last year (I wrote about the two ETF here). As VWRA is newer, the bid to offer spread is not as tight as IWDA, which is a well traded and rather liquid ETF.

Nevertheless, the bid-offer spread for VWRA can be within 20 basis points (0.20%) but sometimes I do see that it can widen. Sometimes it can be at 7.5 basis points.

The biggest difference is the benchmark indices that both ETF tries to replicate. You may be deciding which ETF to invest in based on your philosophy towards MSCI World and FTSE All-World Index.

I do question whether we are fussing over something that makes significant impact or whether the significance is pretty low.

Which is what this article sought to explore.

FTSE All World vs MSCI World

Each index have their own methodology. Each index provider (FTSE, MSCI) have their own methodology as well.

MSCI World Index captures the large and mid cap representation across 23 Developed Markets (DM) countries. DM countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Isreal, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.

FTSE All-World Index is a market-capitalisation weighted index trying to capture the performance of large and mid-cap stocks from the FTSE Global Equity Index series. The index covers developed and emerging markets.

Countries include Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Czech Rep, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Isreal, Italy, Japan, Korea, Kuwait, Malaysia, Mexico, Netherlands, New Zealand, Norway, Pakistan, Peru, Philippines, Poland, Portugal, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, UAE, UK, USA.

The difference is mainly whether you wish a single fund to give you exposure to both developed and emerging markets.

If so, the choice is VWRA. If not it is IWDA.

Here is the geographical composition of IWDA:

IWDA Country Exposure: IShares

Here is the geographical composition of VWRA:

VWRA Country Exposure: Vanguard

The main difference is the composition of the United States and China. IWDA do not have China exposure while VWRA currently has higher China exposure (as well as emerging markets countries) and lower United States.

Does Emerging Market Exposure Give Outperformance?

We compare performance next.

The good thing about ETFs is that we can review the history of returns of the benchmark index the ETF is trying to replicate to find out how they do.

I have access to MSCI World index data but not FTSE All-World Index.

However, I think the MSCI All Country World Index (ACWI) should match up very well to the FTSE All-World Index. The MSCI All Country World Index seeks to capture the representation of 23 developed markets and 26 emerging markets.

I wanted to use the MSCI World and MSCI ACWI net of dividends. MSCI provides both index where withholding taxes are deducted from the dividends re-invested (net) and withholding taxes not deducted (gross).

The net index would probably be more conservative. Lower return as well.

However, the earliest data that I have for the net index is in 1999 but for the gross index, I will have the data from 1988 onwards.

This means I have 22.5 years worth of returns data from Jan 1988 to May 2020.

My first thought is that in some years MSCI World will do better and in some years MSCI ACWI will do better.

Here is the month-by-month returns of MSCI ACWI minus MSCI World:

Click to see larger illustration

There are a lot of small bars. If the bars are above zero, ACWI has higher return for that month. If lower, than MSCI World did better. There are more months where MSCI ACWI have higher returns.

However, the largest difference is less than 1% for a month. On average, the difference is very small (but they do compound over time.)

You will also notice that there isn’t a prolong period where ACWI did better than World.

Reviewing the Long Term Returns of MSCI World and MSCI All Country World.

You are probably less interested in the month by month returns if you are investing for the long term.

So it is only natural we pit the long term returns of the MSCI World vs the MSCI All Country World.

Your experience will differ depend on which period you invest in. You could have started investing in a period where the returns are very good or you could have started investing in a period where returns are a bit gone case.

So let us look at the 5-year rolling returns and 10-year rolling returns of these 2 indexes. For those who are new to rolling returns, you can read this article I wrote at Providend on what are rolling returns, and how reviewing rolling returns of a portfolio may give you greater conviction to invest.

We have 389 months between 1988 to May 2020.

5-Year Rolling Returns

There were 330 5-year periods between 1988 to May 2020 if you roll month-by-month.

1 rolling period will be from 1 Jan 1988 to 31 Dec 1992. The next rolling period will be from 1 Feb 1988 to 31 Jan 1993 and so on and so forth.

If I were to plot out the rolling returns of MSCI World and ACWI in two lines, we get something like this:

Click to see larger chart

On a 5 year basis, there are some periods where you annualized returns is 7.81%. There are also periods where the 5-year returns are -4.24%.

You can observe how the grey line (MSCI World) hugs close to the blue line (MSCI ACWI). At some part, the difference is greater.

There are 330 5-year period. Of these:

  1. 159 5-year periods MSCI ACWI did better
  2. 171 5-year periods MSCI World did better

Magnitude of difference:

MSCI ACWI vs MSCI WorldAnnualized Return DifferenceCumulative Return Difference
Largest1.36%6.98%
75th Percentile0.51%2.58%
Median-0.05%0.25%
25th Percentile-0.71%-3.50%
Lowest-1.56%-7.56%
Just how signficant are the differences over a 5-year period?

The difference feels small. Even in the most extreme, the 5-year difference is about 7%.

To give you context, if you earn an annualized return of 6% a year for 5 years, the cumulative return is 33.8. A 7% difference is about 21% performance difference. This is the extreme case.

On an average, the difference is small.

10-Year Rolling Returns

There were 270 10-year periods between 1988 to May 2020 if you roll month-by-month.

1 rolling period will be from 1 Jan 1988 to 31 Dec 1997. The next rolling period will be from 1 Feb 1988 to 31 Jan 1998 and so on and so forth.

If I were to plot out the rolling returns of MSCI World and ACWI in two lines, we get something like this:

Click to view larger illustration

On a 10 year basis, there are some periods where you annualized returns is 13.46%. There are also periods where the 10-year returns are -1.30%.

You can observe how the grey line (MSCI World) hugs close to the blue line (MSCI ACWI). At some part, the difference is greater.

There are 270 10-year period. Of these:

  1. 106 10-year periods MSCI ACWI did better
  2. 164 10-year periods MSCI World did better

Magnitude of difference:

MSCI ACWI vs MSCI WorldAnnualized Return DifferenceCumulative Return Difference
Largest0.88%9.16%
75th Percentile0.37%3.76%
Median-0.20%-1.98%
25th Percentile-0.35%-3.44%
Lowest-0.84%-8.09%
Just how signficant are the differences over a 10-year period?

On average, the MSCI World did better than the MSCI ACWI over different rolling returns.

To give you context, suppose you earn an annualized return of 6% a year over 10 years, the cumulative return is 79%. While an 8-9% return difference is about 10% of the difference, I do not think it is a particular deal-breaker.

Conclusion

Which should you choose?

Based on my data

  1. There are 5-year, 10-year periods the VWRA may do better and there are periods where IWDA will do better
  2. Difference can vary but I felt it is livable and not such a big difference

Given this, if you are holding IWDA and wanted to get exposure to the emerging markets, your mileage may depend on how much exposure you add. If you choose to switch over to VWRA, there is no guarantee you will notice differences.

If you are holding VWRA, you are more diversified.

The purpose of diversification is not only to diversify away from the risk. It is to capture the returns.

To give an example, suppose the top 25 firms in China, and top firm in South Africa in the next 20 years became a titan, if you invest in IWDA, you would not be able to capture the return.

If you invest in VWRA, you will be exposed to capture it.

That said, emerging markets do come with greater risks and volatility as well.

As a side note, for the past 22.5 years, the standard deviation of MSCI ACWI versus World is 15.03% versus 14.83%.

From the past 22.5 years, emerging markets such as China have grown massively, so VWRA should do well, yet the dent on performance is still not very clear.

This may be because the firms in developed markets have done relatively well as well.

What is more important is to :

  1. Get started
  2. Create an allocation
  3. Start funding and do regular contribution
  4. Capture the returns

How can You Invest in IWDA or VWRA (or any other Tax-efficient UCITS ETFs on London Stock Exchange)?

VWRA or IWDA can be purchase through a brokerage that allows you to trade shares on the London Stock Exchange (LSE).

Some brokers allows you to trade on the LSE are

  • Interactive Brokers.
  • Standard Chartered Online Trading
  • DBS Vickers
  • Saxo
  • POEMS

Personally, I use Interactive Brokers to buy and hold VWRA.

Interactive Brokers is one of the most cost-effective platforms to invest in these UCITS ETF that are better tax optimized. Your trading cost would be 0.05% or less.

However, it is more optimized for those who centralized at least U$100,000 of their investments in it. For those with less capital, Standard Chartered Trading and Saxo would be more suitable.

To help you get started with Interactive Brokers, I have written a set of articles explaining the virtues and weaknesses of the broker platform, how you can get started so that it will be a smoother ride for you.

My Comprehensive Interactive Brokers How-to Funpack

Here are some of my past articles on wealth building with Interactive Brokers. I hope it makes your life easier and brighter.

  1. An Easy Step-By-Step Guide to Setup Interactive Brokers (IBKR)
  2. How to Fund & Withdraw Funds from Your Interactive Brokers Account
  3. How to Convert Currencies in Interactive Brokers
  4. How to Buy and Sell Stocks and Securities on Interactive Brokers
  5. How Competitive are Interactive Brokers Commissions Pricing? And Also Explaining the US$10 Monthly Activity Fee
  6. Send Money from TransferWise to Interactive Brokers

My Research on Other Tax-Efficient Index ETF Long-Term Rolling Returns Research

I do have a few other data-driven Index ETF articles. These are suitable if you are interested in constructing a low-cost, well-diversified, passive portfolio for yourself.

You can check them out here:

  1. IWDA vs VWRA – Are There Significant Performance Differences Between the Two Low-Cost ETFs?
  2. The Beauty of High Yield Bond Funds – What the Data Tells Us
  3. Searching for Higher Yield in Emerging Market Bonds
  4. Should We Add MSCI World Small-Cap ETF (WSML) to Our Passive Portfolio?

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
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  5. Free Stock Portfolio Tracking Google Sheets that many love
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  7. Providend – Where I currently work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works
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JS

Thursday 31st of December 2020

Hi Kyith, can i check if we should be concern over the forex (USD-SGD) risk? Since ETF play is mostly for long term investing. What if, say in 20-30 years time USD depreciate against SGD and we are entering retirement stage, wont this affect the value of our portfolio? Since we need SGD to retire?

Hans

Friday 25th of September 2020

Hi Kyith, nice write up. I was looking at price history of VWRA and VWRD vs the underlying index (FTSE All World) but it looks like both ETFs are close to the peak before COVID while the index is still down by a lot? Do you know the reason for this? Is it down to a tracking error?

Kyith

Saturday 26th of September 2020

Hi Hans, I am not sure but when i observe VWRA through the factsheet the benchmark looks higher leh

curious

Wednesday 5th of August 2020

Hi, For a first time investor in his 20s thinking of doing a monthly 1k DCA , would you recommend going with VWRA over VWRD? also seems like interactive brokers charges monthly account fees for <100k would you recommend going with SCB instead?

Kyith

Thursday 6th of August 2020

I think you can start with SCB to be more cost-effective. Regarding VWRA or VWRD, I think VWRD is more liquid and it provides you a dividend payout. However, they are essentially the same thing. I prefer VWRA because I don't want to be so bothered about the dividend. Oh! I think VWRD is in GBP while VWRA is USD. So there is some difference.

If you wish to DCA think about the cost. You can bunch up the transactions in quarterly, half yearly or annually. You missed out on opportunity costs. However, I think not much difference over the long run. Unless you have something in March, most of the time the volatility in year is low. IF you DCA over 12 months when the market went up or DCA over 12 months when the market go down, and 4 years later the market is vastly higher/lower, how would you feel?

investing over 40 years on an annual basis is also DCA.

Den

Friday 31st of July 2020

Hi, I'm rather new to investing and I'm curious on the dividend payout for IWDA and VWRA. I notice that IWDA is trading at a much lower price than VRWA now. If I would like to invest $1000, wouldn't I be able to gain more dividends if I buy IWDA, since I'm able to purchase more lots for IWDA than VWRA with the same amount of money? Does it work this way?

VG

Wednesday 26th of August 2020

SPDR also has a MSCI WORLD ETF ACCUMULATION category. Lowest TER. Quality at par with VG / BlackRock

Kyith

Sunday 2nd of August 2020

Hi Den, I think what you are referring to is that the listed unit price of IWDA is lower than VWRA. We cannot look at things that way. Both VWRA and IWDA try to track their respective indexes. When you invest in IWDA and VWRA, think of it as investing in that index, so your question would more likely be is the MSCI World cheaper than the MSCI All country world. This is a discussion for another day.

With regards to dividends, both pays almost the same dividends, but because both are accumulating funds, which means funds that reinvest the dividends back into the ETF, you would not see any distributions. I actually prefer it this way so that I do not need to account for the dividends.

JA

Monday 13th of July 2020

Thanks for the detailed info. A number of people seem to be concerned with VWRA's lower volume and higher bid-ask spread. People seem to confuse an ETF's volume with its liquidity. What really determines an ETF's liquidity is its underlying securities, which in VWRA's case, is a non-issue since its underlying holdings are the world's biggest companies by market cap. See these for more details: https://am.jpmorgan.com/blob-gim/1383272223898/83456/1323416812894_Debunking-myths-about-ETF-liquidity.pdf https://canadiancouchpotato.com/2012/09/10/etf-liquidity-and-trading-volume/

Another thing to note about bid-ask spread, unless you're trading frequently (which I presume we aren't since we're all long-term investors here) you shouldn't be overly concerned about this.

Personally, I'm investing in VWRA. For just an additional 2 basis points, you get more diversification, since once cannot predict which sector will outperform in the future :-)

Kyith

Sunday 6th of September 2020

Hi JA, sorry for the late reply. That is my thinking all along. But I was afraid some people are not comfortable with this. Personally, I think those are acceptable.

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