A Beginner's Guide to
Global Index Funds

Global Index Funds: At A Glance

Introduction

If you've read my guide to index funds and ETFs, you already know what an index fund is: a basket of companies, rather than a single stock.

We're now going to take things one step further and answer a question I get asked constantly: which index fund should you actually track?

Out of everything I cover, this is the type of investment I talk about the most - simply because it's the one I use to grow the vast majority of my own money.

I'm not going to tell you it's the only way to invest. Hopefully, you know that isn't the case.

But I do want to make sure you know exactly what a global index fund is, how it works, and why it's the approach I've personally stuck with since 2018.

Let's get into it!

What Is a Global Index Fund & How Does It Actually Work?

Quick recap before we jump into things: aside from a few minor differences, index funds and ETFs are pretty much the same thing (if you need a reminder, you can read about both here).

A global index fund, then, is simply one which tracks the entire global stock market - rather than just one country like the UK's FTSE 100 or the US' S&P 500.

Because a global index fund is, well, global, they often have thousands of companies inside their "basket", meaning they're incredibly well diversified.

Most funds, not just global index funds, have an Accumulating or Distributing version.

When you're investing in an ISA or SIPP, any dividends a Distributing version pays out to you will never use up any of your annual dividend allowance.

Which one you choose doesn't really matter - both versions will have the same performance.

Just like how the S&P 500 includes the US' top 500 companies in different percentages depending on their performance, global index funds have something called market-cap weighting. Each country isn't allocated a specific percentage in a global index fund.

Instead, each is weighted to represent how much of the global economy they represent.

So, if the US makes up around 60% of the global stock market, it'll make up around 60% of the global fund, too.

As economies grow or shrink relative to each other, this weighting shifts automatically. That's right: you won't ever need to rebalance or try and predict which country will dominate the global economy - the fund you're investing in does all the work for you.

It might look like the US will continue to dominate the stock market - but I bet everyone in Japan thought the same back in 1989!

No one has a crystal ball when it comes to the stock market, and that's precisely why I see global index funds as a bit of an insurance policy - more on why below!

Why I Invest in Global Funds

This has been my investing approach since 2018, but it wasn't always. Like a lot of people, I thought I'd be able to spot the next Apple or Nvidia and started by trying to pick individual stocks. I lost a lot of money doing this, and that's genuinely a big part of why I've stuck to global funds ever since.

Here's why I think this approach works:

• Diversification: I own thousands of companies across every corner of the world, including developed and emerging markets - all inside a single fund
• No guesswork: I don't need to predict which country, sector, or company performs best over the next decade - I already own them all because global index funds are...
• Self-cleansing: as countries and companies rise and fall, the fund automatically reflect that - just as they would have done as Japan gradually occupied less and less of the market
• Fewer behavioural mistakes: being self-cleansing, I'm far less likely to panic sell or try and time the market - that's where most investors go wrong
• Natural currency spread: because the underlying companies earn revenue in dozens of currencies, you're not exposed to fluctuations as much

And I put my money where my mouth is - roughly 90% of my entire portfolio is in global index funds and ETFs, and has grown to £200,000 since I started investing. Going forward, I can't see my approach changing either: this approach suits me, my time horizon, and my risk tolerance, and I genuinely love how passive and hands-off it is.

Global Funds vs the S&P 500

One of the most common questions I get asked is "Should I just use an S&P 500 fund instead?" I get it - especially since legendary investors, including Warren Buffett, say that's genuinely all you need.

But it's worth remembering: global index funds still hold a huge chunk of US stocks anyway (currently 55-65%) so you're never actually avoiding the US.

Instead, you're just preventing overexposure to the US by adding some other countries into the mix.

To make this less theoretical, here's a real comparison between VUAG (an S&P 500 ETF) and VWRP (a FTSE All-World global ETF):

There's no objectively "right" answer here: some people split their contributions 50/50 between a global fund and an S&P 500 fund to increase their exposure to the US, and others are firmly either/or. Remember, though: the extra gains can be tempting, but remember the corrections and crashes will also be steeper, too.

Ultimately, it comes down to what you're more comfortable holding for the long term and whether you believe the US will continue to dominate.

Weighing It Up

So if, as we've just seen, global index funds have underperformed pure S&P 500 funds, and are still heavily concentrated in the US, why do I still think they're such a great way to invest for so many people?

Let's have a look at some of the pros and cons below:

Hopefully, the above table shows you that some of the cons are really just trade-offs rather than dealbreakers.

For example, "average" returns from investing in a global index fund still outperforms 90% of actively managed funds, and if the heavy concentration in the US concerns you, remember that's a snapshot of today - not a permanent feature.

Popular Global Funds & ETFs

There are loads more I could have included, but, as you can see, there isn't that much different between them.

The main thing is, if you're going to use a global index fund as your main or only investment, to pick one and stick with it.

Worth remembering, too: when the underlying returns are this similar, fees become a far bigger deciding factor than they might first seem, since they're one of the few things within your control.

For a fuller side-by-side of the current options, you can compare them using my comparison tool here [placeholder link, awaiting Ryan's tool URL].

Vanguard's New Global ETF: VALL

If you've been following me for a while, you'll know the majority of my portfolio is invested in Vanguard's FTSE Global All Cap, which is a mutual fund.

But there's a new kid on the block. Vanguard recently launched an ETF version, VALL, and it's caused quite a stir.

This is genuinely HUGE news for UK investors, and I've covered it in more detail in a YouTube video, which you can watch by clicking here.

If I was to swap my £200,000 portfolio from the mutual fund to this new ETF version, I could be looking at saving approximately £320 in fees each year, which, over the 20 or 30 years I have left in the market, could be quite the saving!

BUT I think I'm going to hold off for a few months for a few reasons:

• Wider Spreads: as a new, less liquid fund, the difference between the buy and sell price is likely to be larger for a bit
• Tracking Differences: it can take a bit of time for a newly established fund to fully build out its holdings and track its index accurately

All that being said, lots of people are already making the switch - it really is up to you.

Your Next Steps

Hopefully, you're now clearer on what a global index fund actually is, how it works, and whether it's a sensible fit for your own portfolio.

Here's what to do next:

As with everything I cover, there's no single "correct" answer here, just what genuinely fits your own comfort level and what you're likely to stick with for decades, not months.

And if you want more hands-on help, whether that's deciding between global and US funds, or building your wider investing strategy, you can click here:

See How I Can Help