iShares MSCI ACWI ex U.S. ETF (ticker: ACWX)
Expected Return: 8.5% per year
Expected Volatility: 20.0% per year
Rating: BUY
Thesis:
As long-term investors, we believe the equity markets will increase over time, and the international (non U.S.) developed market (countries with developed economies) portion of the equity markets will increase at a similar rate as the U.S. markets, however they provide very important diversification benefits that are not available by investing in U.S. markets alone. The iShares MSCI All Country World Index (ACWI) ex U.S. ETF (ticker: ACWX) offers reliable exposure to the returns of international markets while avoiding the many pitfalls that are common among other ETFs and among other equity investments in general.
Holdings:
ACWX invests in over 1,100 non-U.S. stocks from twenty-one developed market countries. At least 90% of its assets are invested in securities of the MSCI ACWI ex U.S. Index. The fund may invest the remainder of its assets in certain depository receipts and derivatives such as futures, options, swap contracts and cash equivalents. The index is one of the most commonly followed equity indices in the World, and is largely considered the standard benchmark for non-U.S. developed market stocks. The performance of ACWX has historically matched the performance of the MSCI ACWI ex U.S. Index very closely, and it should continue to track closely in the future because of its construction methodology. Investors cannot purchase the actual index, and ACWX is the next best thing.
Volume and Liquidity:
As a standard ETF, ACWX has significant volume and liquidity (total ACWX assets exceed $1.8 billion). Because of the volume and liquidity, the bid-ask spread is small (the bid-ask spread is the difference in price at any given time for someone buying the security and someone selling it. There is a difference because the middle man takes a very small cut). A small bid-ask spread is good because it saves you money when you trade. Second, ACWX trades very close to its net asset value (NAV) because of the large volume and liquidity. NAV is the actual value if you add up the value of all the securities held within ACWX. For many less liquid ETFs, the NAV may vary from its actual market price (the price the ETF trades at in the market). This makes ACWX much less risky for investors compared to other ETFs that may vary widely in price versus NAV. Additionally, small investors don’t have to worry about some big investor coming in, buying or selling an enormous amount of ACWX, and subsequently adversely moving the market price away from its NAV because the volume of ACWX is already so great that this risk is essentially non-existent.
Low Fees:
The net expense ratio on ACWX is currently 33 basis points (0.33%). This is extremely low for international market exposure; it is good for investors because it allows them to achieve better returns on their investment. For comparison, international mutual funds (a common competitor to ETFs) may charge over 200 basis points (2.0%) per year, and they tend to deliver worse performance over the long-term. Additionally, there is no expensive sales charge or separate investment advisor fee because ACWX can be purchased directly through a discount broker (e.g. Scottrade, E*TRADE, TD Ameritrade, Interactive Brokers, etc.). The discount broker may charge you a one-time trading fee of $8 or less, but this is much better than the 2-5% sales charge/management fee you’d get charged by a full service financial advisor. Additionally, there is no hidden 25 basis point (0.025%) annual 12b-1 fee paid to someone for “servicing your account.” The bottom line here is that ACWX is a very low cost way to get great exposure to the equity market and to build considerable wealth over the long-term.
Dividend Reinvestment:
One last point of consideration, ACWX pays a quarterly dividend (around 2.93% per year), and this dividend is NOT automatically reinvested back into ACWX (this is standard protocol for ETFs and stocks). This means you’ll build up a cash balance in your account if you don’t withdraw it or manually reinvest it. As a long-term investor, cash is generally a drag on investment performance. Unless you plan to withdraw and use the cash, we highly recommend you develop a process to reinvest it. Most discount brokers (Scottrade, Interactive Brokers, etc.) offer automatic dividend reinvestment programs. We highly recommend you sign up for these programs to avoid the situation where cash builds up in your account and becomes a drag on your long-term investment performance. Reinvesting dividends is important.
Conclusion:
ACWX is a very low cost, relatively low risk, security that allows investors to build significant wealth over the long-term. We consider ACWX to be a basic building block for long-term wealth, and we rate ACWI as a “Buy.” For more information, you can view the fact sheet for this ETF here.