If you are looking to invest for the long-term, you probably have come across VTI, a Vanguard ETF, along with ETFs that track the MSCI World index. So, naturally, you may wonder what the differences are as they will determine which one you should go with.
For conservative investors, both VTI and an MSCI World ETF can provide adequate protection against inflation and help you achieve your retirement goals. But going with both may be overkill…
I promise you that after reading this article you will know exactly what the differences here are and be ready to start investing in either.
More specifically, you will learn:
- The difference between VTI and MSCI World managers
- How diversified the two different types of funds are
- What their returns look like in the same time-frame
- What fees you can expect to be charged by investing in either ETF
FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!
What are the Differences?
So, let’s take a look at the differences between VTI and MSCI World ETFs.
Just keep in mind that to make this comparison as fair as possible, I will be picking the best ETF that tracks the MSCI world to compare with VTI when it comes to management, performance, and fee structure.
Let’s get right into it then…
First of all, when selecting a fund to put your money in, you need to see who will be managing that fund.
VTI is an ETF managed by Vanguard, one of the most established fund management companies out there with $6.7 trillion in assets under management.
You know your money is in good hands when a fund manager has been around for more than 45 years and specializes in index funds. After all, Vanguard’s founder, John Bogle, was the first to ever create such a fund.
When it comes to MSCI World ETFs now, the most established and trustworthy fund manager is easily Blackrock. It’s a fund management company that issued the oldest fund to track MSCI World; the iShares MSCI World UCITS.
Though not as old as Vanguard, with $8.67 trillion of assets under management, Blackrock is actually the world’s largest asset manager. This goes to show the level of trust they have achieved after 33 years of existence.
As you can see, we got a tie here. When it comes to who will be managing your money, you can’t really go wrong with either.
Next comes the diversification level; or how diversified your portfolio will be with either fund.
VTI tracks the CRSP US Total Market Index which includes around 4,000 US stocks. That’s an outstanding level of diversification. On the other hand, all ETFs that track the MSCI World index will be investing in around 1,500 stocks across 23 countries.
Now, MSCI World funds may be invested in fewer stocks here, but the fact that these stocks cross borders can make them a safer investment than VTI. This obviously adds to the diversification level since the more stocks you add to your portfolio that are from different countries, the less correlated the stocks in your portfolio will be.
For example, any financial advisor will tell you that adding some securities other than stocks in your portfolio will be a very effective diversification since you basically want something to hedge against stocks to be considered diversified. In other words, something that doesn’t move in lockstep with stocks. Stocks from different countries (economies) often do the trick.
So, when it comes to diversification, MSCI World ETFs are obviously the better choice here.
Now, we’re getting to the most important parameter in ETF selection; performance.
So, let’s compare VTI with Lyxor MSCI World, the most well-performing ETF among those that track the MSCI World index over a 10-year and a 5-year period.
VTI has had an average 13.45% annual return over the last 10 years. In the same time-frame, Lyxor MSCI World has had a 12.73% annual return.
Zooming in, VTI has returned an outstanding 17.45% over 5 years, while Lyxor MSCI World only 14.30% in the same period.
If this difference in performance can be sustained in the long-term, there is no doubt that you will manage to get way better compound returns with VTI. But of course, no one can guarantee this; it’s just the most important factor in deciding where to invest your money. So, you work with what you have.
Keep in mind that the more you stretch your time-frame, the less impressive the returns are going to look like. But with VTI’s 8.33% annual return since its inception 20 years ago, it managed to provide a satisfying return for long-term investors.
Unfortunately, Lyxor’s ETF isn’t that old for us to make an “apples to apples” comparison.
Overall though, VTI beats the best-performing MSCI World ETF when it comes to performance.
Fees are not a very important parameter when it comes to ETF selection, but if you’re in for the long haul, they can impact your returns to a noticeable degree after some years.
Here, we will compare the expense ratio of VTI and the cheapest MSCI World ETF, Lyxor Core MSCI World (not to be confused with the Lyxor MSCI World above). The expense ratio is simply the portion of the invested money the managers keep as compensation, expressed as a percentage.
VTI is known for its outstanding expense ratio of 0.03%; only a few ETFs charge so low an expense ratio. In contrast, Lyxor Core MSCI World charges one of 0.12%.
As you can see they’re both very cheap to manage, but there is a huge difference between them. Hands down, VTI is the better option when it comes to fees.
Let’s also note how the ridiculously low expense ratio may have contributed to VTI’s better performance here beyond the fact that it’s less diversified.
FYI: The best way I've found to invest is through M1 Finance. It's free and you even get an instant line of credit and 100$! Have a look here (link to M1 Finance).
Overall, both types of ETFs could help you grow your money steadily and safely over the long-term. But when it comes to historical profitability and fees, VTI is clearly the winner here.
One more thing you should keep in mind is that diversification helps reduce volatility, not risk. Many investors confuse the two. If you do not intend to touch your fund for a long time, then volatility becomes irrelevant and shouldn’t scare you.
Although, if you require liquidity and don’t think you can restrain yourself from touching your investment fund, short-term volatility can make you realize some loss depending on when and how much money you withdraw from it. So, the ETF which is more diversified could be the better option for you.
Just something you should keep in mind before you pick an ETF.
Now, I want to thank you for taking the time to read this and I also would like to ask you to share it with others if you found it useful.
If you still need help with something, don’t hesitate to ask me in the comments.
Take care and invest safely…
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!
2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.
5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!
To see all of my most up-to-date recommendations, check out the Recommended Tools section.