Best global equity ETFs for Australian investors
These exchange-traded funds all earn Morningstar medallist ratings.
Mentioned: iShares MSCI Emerging Markets ETF (AU) (IEM), Vaneck Msci International Quality Etf (QUAL), Vanguard MSCI Intl ETF (VGS)
International equity is one of the most popular categories for ETF investors as they seek global opportunities and diversification. As of 31 July 2021, almost $60 billion is invested in ETFs tracking global shares, up from $28 billion a year before.
Morningstar analysts' rate ETFs based on a five-pillar system – people, performance, process, price and parents. In this article, we review some of their favourites across a range of sub-categories.
What are global equity ETFs
Global equity exchange-traded funds (ETFs) are listed funds that track a global equity index. Foreign-domiciled securities are selected and weighted to mirror the returns of an index like the S&P 500 or the MSCI International Shares Index. Managers who oversee passive ETFs are hands-off, ensuring that their ETFs track their designated indices.
Global equity ETFs are a diverse bunch covering everything from country/region-specific funds to sector and thematic funds. The former gives exposure to a single economy like the United States or China. The latter to a global industry like healthcare or theme like renewable energy. Funds that invest in less-developed economies are referred to as emerging market funds.
International equity funds often come with a hedged version that attempts to offset the impact of currency fluctuations (for an additional fee).
We’re screened for a selection from all the major categories. Australia's international equity ETF category includes both passively and actively managed ETFs, but the article focuses on the former.
Morningstar's top picks
Analysts publish qualitative ratings for approximately 80 Australian ETFs. Most of the funds that receive an Analyst Rating are potential 'core' portfolio building blocks.
This system adopts the same "five pillars" methodology used to evaluate traditional unlisted managed mutual funds—process, performance, price, people and parent company.
If a fund receives a Gold rating, this means it's a 'best-of-breed fund that has distinguished itself across the five pillars.
Morningstar's ratings speak to the quality of the fund and how it compares to similar funds. They’re not a reflection of whether analysts think the fund (or the index it tracks) is undervalued.
We’ve included all those funds which have received a Bronze rating or better.
Global equity large-cap ETFs
For broad global exposure, Morningstar analysts have a preference for gold-rated Vanguard MSCI Intl ETF (VGS). The strategy covers large- and mid-cap stocks from 22 developed markets. It sorts stocks by their market cap and targets those that rank in the top 85% by market cap.Â
Here's what Morningstar analyst Zunjar Sanzgiri had to say about it:
"Vanguard MSCI International ETF VGS is an outstanding choice for investors considering its price advantage, liquidity, portfolio diversification, and a track record of effective implementation. The strategy sets a high hurdle for active managers to beat, owing to its remarkably low cost. The strong parent support and Vanguard's growing scale provide reliability and conviction to the investors. Cheaper rivals have indeed made a foray into the segment, but VGS' scale helps it achieve the lowest bid-ask spreads among its peers. The ETF cross-invests into the larger unlisted version (Vanguard International Shares Index), providing it with the benefits of scale.
With close to 1,500 constituents, the MSCI World ex Australia Index is a widely popular barometer for the world's developed-markets equities. The index has country-concentration risk (the United States forms 68% of the index), but a high allocation to the US is a common feature across most global indexes. Helping mitigate this risk is the fact that many of the large stocks are multinationals, earning substantial revenue from international markets.
The constituents of the index are well-known and are generally leaders in their respective industries with a high degree of analyst coverage and a plethora of public information made readily available. Underrepresented sectors in Australia such as information technology and healthcare are well-represented in the MSCI World ex Australia Index, with around 33% exposure as of 31 July 2021.
Vanguard's chunky US exposure helped it outperform active rivals that were often underweight the US, resulting in Vanguard outperforming the category average every year from 2015 to 2019, barring 2017. The vehicle delivered an annualised return of 14.1% since launch to 31 July 2021."
Global equity large-cap ETFs – strategic beta
For investors seeking broad global exposure with a 'quality' screen, analysts have called out the Silver-rated VanEck MSCI World ex Aus Qlty ETF (QUAL). Driven by academic research, the benchmark aims to capture the performance of high-quality growth stocks.
Here's what Morningstar analyst Kongkon Gogoi had to say about it:
"For investors seeking to diversify their core Australian equity exposure, VanEck Vectors MSCI World Ex Australia Quality ETF QUAL presents an excellent choice for its solid investment thesis, effective implementation, and unmatched performance offered at a competitive price. The quality factor captures durable businesses that generate earnings that are less susceptible to broader economic cyclicality, giving them a competitive edge. Stocks with quality traits are more resilient during distressed markets and elevated volatility, which leads to outperformance. Solidifying the investment case here is the attractive fee of 0.40%, which gives the strategy a substantial price advantage over its active peers.
The Quality Index is carved out of the broader MSCI World Ex Australia Index based on three distinct quality growth fundamentals: return on equity, earnings growth stability, and low balance-sheet leverage. All three variables are equally weighted and generate a quality score, ranked for each security. The top 300 ranked securities are chosen to constitute the quality index and cover around 30%-40% of total market cap as the portfolio tilts toward large companies.
This way of capturing the strategic beta yields a portfolio markedly different from the MSCI World Ex Australia Index in two aspects: gravitation toward more large-cap growth names and more refined sector and geographic exposure. Focus on quality metrics makes the technology, media, and telecom (TMT), healthcare, and consumer staples exposure more prominent in the Quality Index than in its parent. Only a few financials stocks make the cut given their leveraged balance sheets.
The ETF has delivered the most notable performance in 2018, solidifying the underlying thesis of quality growth portfolio’s outperformance during choppy markets. In 2018, it beat the category average by 4.8% while against the MSCI World ex Australia Index it posted an outperformance of 2.8%. In the first half of 2020 through June, substantial allocations to TMT and healthcare saw the ETF posting 3.5% versus the category average of negative 4.3%."
Global equity emerging markets ETFs
Looking to emerging economies, analysts point investors to the Bronze-rated iShares MSCI Emerging Markets ETF (IEM). IEM seeks to mimic the risk/return profile of MSCI Emerging Markets Index, a market-cap-weighted index designed to capture the equity market performance of about 27 emerging economies.
Here's what Morningstar analyst Kongkon Gogoi had to say about it:
"iShares MSCI Emerging Markets ETF (AU) IEM offers passively managed exposure to emerging-markets risks that may not be adequately compensated, but we maintain our conviction in the strategy to perform well over the long haul for its broad portfolio and an appealing expense ratio.
Subjected to an investor's resiliency to sustain through heightened volatility, emerging markets offer investors nonlinear growth opportunities and higher expected returns relative to developed markets - not to mention diversification benefit that comes along with it. Given the inherent volatility in emerging markets, investors should use this ETF as a supporting player as part of a broader international equity exposure.
The index represents approximately 85% of the total market capitalisation of 27 emerging markets. It holds over 1,200 names and the top 10 positions account for 26% of its assets. Akin to any global emerging-markets portfolio, Chinese equities' dominance is inevitable here, too. The China allocation has magnified in recent years specifically after the inclusion of China A-shares
The ETF is offered at a price of 68 basis points, one of the lowest but not the cheapest among the cohort in Australia offering emerging-markets exposure.
Our conviction in achieving long-term risk-adjusted outperformance rests with high-quality active strategies. However, owing to the ample diligence and cost involved in underwriting an actively managed fund, IEM offers an appealing alternative as a low-cost and minimal maintenance option that has delivered over multiple market cycles.
Emerging markets also lagged many developed markets over the trailing 10 years through May 2021. The fund underperformed the MSCI World Index by 7.2 percentage points per year but managed to provide a few short periods of solid performance. It rebounded from the coronavirus sell-off faster than many developed markets, outperforming the MSCI World Index by 8.3 percentage points from May 2020 through March 2021."