As I have an 11-month-old daughter, I have started to think more about the world she will grow up in, hoping that it will be environmentally safe and socially fair. Within my equity sleeve, I have added all my new money into the Vanguard ESG Global All Cap UCITS ETF this year.
I contemplated switching 100% of my Vanguard FTSE Global All Cap holding to the Vanguard ESG Global All Cap UCITS ETF. However, since the FTSE Global All Cap fund declined by around 10% over the past year, I didn’t want to crystalise my losses. Once the markets recover, I may consider switching to the Vanguard ESG fund to better align my investments with my values.
Generally, I’m not a fan of narrow ESG portfolios because I don’t like deviating away from broad market capitalisation too much. The Vanguard ESG ETF meets my needs. While the fund follows a comprehensive exclusion-based environmental, social and governance process, it also retains many of the diversification advantages of an unscreened global all-cap index.
This fund tracks the FTSE Choice Global All Cap Index, which excludes companies that have anything to do with non-renewable energy, vice products and weapons. Additionally, the index filters out companies that derive revenue from oil, coal, and gas.
Currently, the fund holds nearly 6,000 stocks that span across both developed and emerging markets. With an ongoing charge of only 0.24%, it is also one of the cheapest funds available in Europe that provides exposure to global large cap equities.
Vanguard Global Aggregate Bond UCITS ETF (VAGP)
This Vanguard ETF offers exposure to global government and corporate bonds – and could be used as the sole fixed income component in a retail portfolio. With an ongoing charge of 0.10%, this fund maintains a material cost advantage over its peers.
VAGP seeks to replicate the performance of the global investment grade fixed income market by tracking the Bloomberg Global Agg index, which is weighed by market capitalisation. The ETF provides diversification across geography, sector, maturity, and credit quality buckets.
It contains a very large number of around 9000 holdings. Additionally, it exclusively invests in investment-grade bonds, making it more likely to protect my portfolio during an economic downturn.
iShares Global Inflation Linked Government Bond UCITS ETF (IGIL)
This is a hypothetical holding. I’m on the Vanguard Investor platform, so I don’t personally have access to this product. A small allocation to the IGIL ETF would protect my portfolio against persistent global inflation. This fund is offered at an ongoing charge of only 0.20%.
This ETF tracks an index that provides a thorough representation of a small but liquid bond market, encompassing all the key issuers and the entire maturity spectrum. Not all governments issue inflation-linked bonds. As such, a large portion of this fund is allocated to the United States and United Kingdom.
It’s worth mentioning that the market of inflation-linked bonds is biased to the issuance of long-dated maturities to cater for the asset liability-matching needs of large institutional investors such as pension funds. As a result, all-maturity passive strategies such as this one come with high duration (typically above 10 years).
Given that central banks have increased interest rates to combat inflationary pressures, this fund’s higher duration profile has impeded its performance. While this fund offers protection against inflation, it will also increase the duration of a portfolio, making it more sensitive to rising interest rates.
Speaking of duration, I’ve added new money into the Vanguard Global Short-Term Bond Index fund this year. In the current economic environment, I wanted to complement my Vanguard Global Agg ETF with a global short-term bond fund to shorten the overall duration of my portfolio.
Monika Calay is head of Morningstar’s EMEA passive strategies research team