VT: How Over-Diversification Can Lead To 'Watered Down' Performance

seekingalpha02-19

Vanguard Total World Stock Index Fund ETF Shares offers massive diversification with over 9,000 holdings, including developed and emerging markets.VT has a 5-year compound annual growth rate of 10.10%...

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href=https://seekingalpha.com/article/4671336-vt-how-overdiversification-can-lead-to-watered-down-performance><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Vanguard Total World Stock Index Fund ETF Shares offers massive diversification with over 9,000 holdings, including developed and emerging markets.VT has a 5-year compound annual growth rate of 10.10%...</p>\n\n<a href=\"https://seekingalpha.com/article/4671336-vt-how-overdiversification-can-lead-to-watered-down-performance\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0642271901.SGD","symbol_name":"Janus Henderson Horizon Global Technology Leaders A2 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INC"},"translate_title":"VT：过度多元化如何导致业绩“淡化”","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ACWI":1,"VT":1,"VOO":1,"META":1,"LLY":1,"GLOF":1,"DGT":1,"AMZN":1,"FDN":0.9,"NVDA":0.9,"SPY":0.69,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,".SPX":0.6,"ESmain":0.6,"IVV":0.6},"content_text":"Vanguard Total World Stock Index Fund ETF Shares offers massive diversification with over 9,000 holdings, including developed and emerging markets.VT has a 5-year compound annual growth rate of 10.10%, underperforming both its global ETF peers as well as the S&P 500 Index.Due to VT's high diversification, it has low weight on top-performing holdings, which will lead the fund to underperformance looking forward.   MediaProduction/E+ via Getty Images Investment Thesis Vanguard Total World Stock Index Fund ETF Shares (NYSEARCA:VT) warrants a hold rating due to its suboptimal performance as a result of extremely high diversification. While VT provides investors with a single fund to capture the returns of both developed and emerging markets, its diversification of over 9,000 holdings has resulted in low weights on several high-performing companies. Therefore, investors can expect reduced performance looking forward in exchange for a low-cost fund with unparalleled diversification. Fund Overview and Compared ETFs VT is an ETF that seeks to track the performance of the FTSE Global All Cap Index. This index covers both developed and still-developing markets with the objective of long-term growth. With its inception in 2008, the fund has a massive 9,767 holdings and $43.51B in AUM. VT’s largest regional investment area is North America (63.80%), followed by Europe (15.70%), Pacific (10.50%), and emerging markets (9.80%). For comparison purposes, other global ETFs examined are SPDR Global Dow ETF (DGT), iShares Global Equity Factor ETF (GLOF), and iShares MSCI ACWI ETF (ACWI). DGT seeks to track the investment results of the Global Dow Index. The fund therefore is made up of approximately 150 global holdings based on size, reputation, and importance in the global economy. GLOF includes large and mid-cap stocks from developed and emerging markets. Its sector weight is heaviest on information technology (26.01%), followed by financials (15.98%) and consumer discretionary (12.89%). ACWI seeks long-term growth through investment in a broad range of international developed and emerging markets. The fund has over 2,000 holdings and is rebalanced semi-annually. Performance, Expense Ratio, and Dividend Yield Because GLOF was initiated in 2015, a 5-year time period was used (versus 10-year or longer) for comparing the performance of all ETFs examined. VT has a 5-year compound annual growth rate, or CAGR, of 10.10%. By comparison, DGT has a 5-year CAGR of 11.03%, GLOF has a 5-year CAGR of 10.37%, and ACWI has a 5-year CAGR of 11.76%. Of note, all of these funds underperformed the S&P 500 Index which has seen a 5-year CAGR of approximately 14%. This is predominantly due to the outperformance of U.S. equities in comparison to international holdings over the past five years.   5-Year Total Price Return: VT and Compared Global Exchange-Traded Funds (Seeking Alpha) VT has the lowest expense ratio compared to peers at 0.07%. While lower than other globally diversified ETFs examined, it is not Vanguard’s lowest expense ratio fund. Vanguard S&P 500 ETF (VOO), for example, has an expense ratio of 0.03%. VT also has a notable dividend yield at 1.67% which has been increasing slightly with a 5-year dividend CAGR of 0.92%. However, this is the lowest dividend yield and growth rate of all other ETFs examined. Expense Ratio, AUM, and Dividend Yield Comparison     VT DGT GLOF ACWI   Expense Ratio 0.07% 0.50% 0.20% 0.32%   AUM $43.51B $183.92M $127.67M $18.60B   Dividend Yield TTM 1.63% 2.47% 2.40% 1.82%   Dividend Growth 5 YR CAGR 0.92% 9.77% 12.52% 6.47%   Click to enlarge Source: Seeking Alpha, 16 Feb 24 VT Holdings and Its Over-diversification Drawback VT has the greatest diversification among peer ETFs examined at 9,767 holdings. Despite this massive diversification, the fund has 15.86% weight on its top 10 holdings. ACWI, which has seen better long-term performance, has nearly 20% weight on its top 10 holdings. Top 10 Holdings for VT and Peer Global ETFs   VT – 9,767 holdings DGT – 154 holdings GLOF – 602 holdings ACWI – 2,339 holdings   AAPL – 3.68% NVDA – 1.00% MSFT – 4.49% MSFT – 4.18%   MSFT – 3.63% META – 0.97% AAPL – 3.79% AAPL – 4.17%   AMZN – 1.77%  AVGO – 0.89% GOOG – 2.41% NVDA – 2.64%   NVDA – 1.53% QCOM – 0.88% NVDA – 2.34% AMZN – 2.30%    GOOGL – 1.08% UNCFF – 0.88% AMZN – 1.93% META – 1.52%   META – 1.02% TRV – 0.84% AVGO – 1.09% GOOGL – 1.25%   GOOG – 0.91% DIS – 0.83% META – 0.95% GOOG – 1.12%   TSLA – 0.89% TSM – 0.83% LLY – 0.93%  LLY – 0.88%    BRK.B – 0.71% AXP – 0.82% NOVO.B – 0.89% AVGO – 0.81%   LLY – 0.64% HWM – 0.81% UNH – 0.86% TSLA – 0.78%   Click to enlarge Source: Multiple, compiled by author on 16 Feb 24 The primary drawback of the high diversification for VT is its relatively low weight on top-performing companies. Three examples of holdings that represent disadvantages for VT due to its relatively low weight are Amazon.com, Inc. (AMZN), Meta Platforms, Inc. (META) and Eli Lilly and Company (LLY). The strengths of each of these holdings are discussed in further detail below. Example #1: Lower Weight on AMZN The first example of VT’s low weight on top holdings is AMZN. With only 1.77% weight, VT is poised to miss the growth of the online retail company. By comparison, ACWI has a 2.30% weight on AMZN, while VOO has 3.44% weight on AMZN. Both ACWI and VOO have outperformed VT historically. VT’s comparatively low weight represents a disadvantage in holdings due to its very strong potential for continued growth and profitability. Amazon has sought to leverage artificial intelligence by incorporating custom AI chips for its cloud computing service. The company has taken measures to increase its efficiency and has multiple attractive metrics, making it primed for a higher share price. Amazon’s growth has been seen with a YoY EBITDA growth of 54.7% as well as a gross profit margin of 46.98%. Its one-year price performance is over 68% but its P/E ratio remains below its own 5-year average. Therefore, VT’s relatively low weight on AMZN is the first example of how over-diversification can lead to reduced performance. Example #2: Lower Weight on META The second disadvantage for VT is its lower weight on META. While VT has a 1.02% weight on META, VOO has 2.13% weight and ACWI has 1.52%. Meta Platforms has demonstrated very strong fundamentals recently including a 28.98% net income margin, a 28.04% return on common equity, and a 42.48% YoY EBITDA growth. Despite these strong metrics, META’s forward P/E ratio and forward EV/EBITDA are less than 5% higher than its own 5-year average. Despite problems with the Metaverse in 2022 and a subsequent layoff of 13% of the company’s workforce, META saw a stellar rebound in 2023. META has also successfully launched multiple AI-driven initiatives including Ray-Ban smart glasses which include Meta AI features. Due to its renewed focus on efficiency and AI projects, META will therefore likely propel ETFs that have it as a holding. Subsequently, this holding is another example of how VT’s low weight will likely drive underperformance. Example #3: Lower Weight on LLY The third example of how over-diversification can drive low weight on winning companies is LLY. Eli Lilly and Company has seen strong growth due to the success of its diabetes and obesity drugs. This success has resulted in a 5-year total price return of a massive 544% and a one-year return of 135%. Furthermore, the company is very profitable with a 79.25% gross profit margin and 34.71% EBITDA margin. However, LLY’s success appears to be already priced in with a 130.65 P/E GAAP. This puts LLY’s P/E at 299% above its sector’s median. However, the company’s obesity drugs are estimated to drive upwards of $65 billion in sales. As a result, while LLY may see a correction due to its high valuation, the holding is primed for consistent, long-term growth. At only 0.64% weight on LLY, VT will insufficiently capture this holding’s future returns. Valuation and Risks to Investors VT has a current price of $106.17 at the time of writing this article. This price is near the top of its 52-week range of $86.13 to $106.59 and below its all-time high of $109.23 in November 2021. VT’s performance over the past six months has lagged both GLOF and ACWI. Of note, both of these compared funds have heavier weight on the high-performing companies discussed earlier.   6-Month Price Return: VT and Compared Global ETFs (Seeking Alpha) Looking at price-to-earnings and price-to-book ratios as measures of valuation, VT demonstrates valuation metrics that are higher than the average of the three funds compared. At 16.5, VT’s P/E is higher than both DGT and GLOF. Additionally, at 2.6, VT’s P/B ratio is also the highest with the exception of ACWI. Valuation Metrics for VT and Peer Global ETF Competitors     VT DGT GLOF ACWI   P/E ratio 16.5 12.68 15.15 19.83   P/B ratio 2.6 1.72 2.51 2.92   Click to enlarge Source: Compiled by Author from Multiple Sources, 16 Feb 24 Given VT’s low weight on top holdings with strong growth potential, I expect the fund to continue to underperform both peer ACWI as well as the S&P 500 Index. One benefit of VT in terms of risk is its inclusion of international holdings. Therefore, while the fund will underperform in the event of strong U.S. domestic growth, VT will likely see a slightly softened blow in the event of a U.S. recession. Concluding Summary  While Vanguard’s Total World Stock ETF grants investors massive diversification with over 9,000 holdings, it is possible for a fund to be “too diversified”. As a result of its high number of holdings, VT has comparatively low weight on top performers including AMZN, META, and LLY. While international holdings are a great complement to U.S. domestic stocks for greater diversification, the strong outlook for these top holdings will likely result in continued underperformance for VT. Therefore, while VT provides investors a simple, low-cost method to achieve massive diversification, the fund does not warrant a buy rating currently.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2412950906"}