VWCE or VUAA

[stepham]

I know it's a constant question, but it's still a difficult decision to make. I'm 28 years old and I'm starting my first investment of my life. I live in Hungary (Eastern EU) and I have €8,000 and I want a portfolio of 1 ETF. I have a relatively high volatility tolerance and would like to achieve higher returns in the short to medium term. As I have seen VUAA (S&P 500) yields 3-5% higher returns on an annual basis, what do you think? Should I choose the S&P 500 or the All-World VWCE ETF with less risk?

 

[cewilder]

@stepham Historical performance doesn't mean it will happen again. There is not much of a predictability possible on the stock market, the money market and treasuries are for that.VWCE is more diversified, you are not forced to choose between countries. On the other hand, if you are a believer in US dominance... The question about risk is one that you have to answer yourself.

 

[oldmantook]

@cewilder Well, although you are right, that diversification is a good thing, to much diversification though can be also negative. In that case what Vwce. Also the S&P 500 that I keep hear that it's only if you believe in US market it's fundamentally wrong. Because, yes it's correlated with the American economy, but with the global one as well. Most of corporations are internationals and they have presence everywhere, they just have their headquarters in America.

 

[cewilder]

@oldmantook Yes, everybody has to find his / her sweet spot between risk and gains, it is so individual, that I don't like giving advice. One must understand the risks and gains involved.

I gave up on looking at US international exposure in that way, but I used to. I figured out that holding solely a US index can't replace the international index, no matter the US's companies exposure to the international market, because there are other risks involved - currency, US laws, and taxation, government, international policies, import-export duties, plus the exposure of non US companies in US market makes the things even more complicated.

After all, if SP500 thanks to its companies' international exposure, replaces the international index, why don't these two indexes have the same performance?

So, I don't like looking at US index in that way.

 

[converting2christ]

@stepham It does not make sense too much, but you can buy both. I do that too from time to time.

 

[michaelv25]

@converting2christ Why buying both wouldn't make sense?

 

[converting2christ]

@michaelv25 It's not exactly the same but around 60% of USA market is already in VWCE. So if you buy VUAA there is a overlap. But there are some small differences.

 

[michaelv25]

@converting2christ Thanks for that!! Are there other similar ones to VWCE in concept, that have less of USA? (Not totally 100% into ETFs myself and still learning )

 

[cewilder]

@michaelv25 It makes sense if you want more than 60% exposure to US. It is not overlapping, it is increasing of US exposure.

 

[bansaw]

@stepham I've just bought VEVE (FTSE developed world index) to have some world exposure, although it's very correlated to USA. I did not buy VWCE simply because I don't like emerging markets, not even at market weight. Sure, they might dominate in 30 years but coming from an EM country myself, I just don't believe that anything substantial will happen in these countries (maybe except India) that individual investors could benefit from.

 

[dirtdizzy]

@stepham It all depends on how much exposure to the USA you’re comfortable with as the S&P500 is based on American companies.

Yes it could be argued it’s not risky as it is the world’s foremost superpower, and you could say if the USA were to lose that status or not be as strong then we’d have other problems to worry about than our investments.

 

[gdf]

@stepham Also wondering this

However, thinking about long term (30 years) who knows how the USA will be

 

[texas0987]

@gdf FTSE is balanced twice a year, I think you have time to change your strategy if the US doesn't lead the financial markets anymore, these are not events that happen overnight.

 

[christodoulos]

@texas0987

I think you have time to change your strategy if the US doesn't lead the financial markets anymore, these are not events that happen overnight.

In most countries you will have to realise gains to do that and pay taxes, which is not worth it in most cases. Just go the more diversified route (VWCE) from the start and you're safe.

 

[enolareverof]

@stepham 27 here, also started recently, spent 1-2 weeks on this topic VWCE vs VUAA, I choose 100% VWCE. Indeed, VUAA could have higher returns, if this is what you need, go for it.

 

[paulmuoga]

@stepham It depends on how much you trust the USA to keep their dominant position for the next years. In case, SP5A might be a cheaper alternative to VUAA, lower TER and NAV

 

[jess75]

@paulmuoga where did you found this information?

 

[nats]

@stepham Based on which market you believe in (preference) and wanna bet for the future. US only, vs the world.

VWCE and VUAA are both good ETFs that track diff indexes. Yes, a lot of companies in VUAA are also in VWCE, because currently US is leading the world. Would it last for the next couple of decades, or would it not, no one knows.

 

[englishmuffin]

@stepham If you happy with taking some risk, why not choose VUAA now, and if turn out US lose it’s dominance in the future you can sell it and switch to VWCE.

As you are a Hungarian tax resident, you can do it without any extra Tax, if you use TBSZ account (tax free investment account, if keep it at least 5 years).

 

[kreative333]

@englishmuffin My partner is a Hungarian tax resident and I'm trying to encourage her to consider opening a TBSZ because of the tax benefits. But, does this not mean that you will have 5 separate ETF accounts if you open one TBSZ each year?