We know that costs can have a huge bearing on investment returns. This is why I’ve a good proportion of my capital invested in index trackers. And when it comes to buying these, US titan Vanguard is one of the first providers I turn to. The passive investing giant charges among the lowest fees around.
Today, I’ll talk about one such fund I plan to hold for decades. And that’s no exaggeration.
Cheap exposure
The vehicle in question is the Vanguard Global Small-Cap Index Fund. This tracks the return of the MSCI World Small Cap Index. In practice, that means Vanguard invests my capital across an absolutely huge range of minnows in developed markets around the world (4,492 to be exact).
It goes without saying that it would be completely impractical and expensive to do this by myself. By sharp contrast, this fund can be bought with a single mouse click and has an ongoing charge of just 0.29%. It also requires no maintenance on my part. I simply invest and do nothing.
But does this low cost translate to a fairly pedestrian performance? It seems not. Had I invested £1,000 in this Vanguard fund five years ago, I’d now have roughly £1,750. That’s a great return considering the simplicity of the strategy.
Unfortunately, I haven’t been invested here for that long. Even so, gains over the last 12 months have been particularly stellar. From 1 August 2020 to the end of July, the fund’s net asset value increased 37.71%. As an indication of how well it tracks its index, the MSCI World Small Cap moved 37.94% higher.
Things to remember
In spite of this great performance, it pays to be aware that even cheap tracker and exchange-traded funds of the sort offered by Vanguard still have their drawbacks.
Logically, a product designed to track an index will never outperform that index. Indeed, a number of my own single company stocks have done a lot better over the last year.
Now, a fully signed-up passive aficionado would say that these higher returns required me to take higher risks. I’d agree, especially when it comes to the small-cap space. Single company stocks can fall in double-digit percentages on some days.
But there are other things to be aware of. For one, the fund could definitely still plummet in value if markets crash. It’s equally important to appreciate that this ‘global fund’ still has by far the biggest proportion of its assets (60%) invested in the US. That might worry some, particularly as valuations across the pond are looking frothy, to say the least.
Investors also need to be conscious that definitions of ‘small’ vary. In the UK, a small company tends to be one valued above £50m but below, say, £500m. Thanks to its aforementioned heavy US weighting, the median market-cap of a holding in Vanguard is actually £2.8bn! This explains why I continue to hold some actively-managed UK funds specialising in this part of the market. The fees are much higher, but I’m hoping to catch the upside missed by the Vanguard fund.
Bottom line
In sum, I’m confident I’ll retain my holding in Vanguard Global Small-Cap until I retire. While not without its limitations, I reckon this can be considered a core holding for any risk-tolerant equity portfolio such as my own.
