All of the world in one fund

This fund, which is priced in U.S. dollars, does not hedge its currency exposure, so its stated returns reflect both asset price changes and translation effects when the value of its holdings is converted into U.S. dollars. For Canadian investors, the lack of hedging means they are essentially exposed to the fluctuations between local currencies and the Canadian dollar. In the 10-year period through December 2012, a rising euro, followed by a rising yen (against the U.S. dollar) helped boost the performance of this fund. However, more recently, the rising dollar has hurt the fund's performance. But over the long term, currency fluctuations have a very small impact on returns.

Fundamental view

This fund is dominated by U.S. and Western European blue-chip multinationals, which during the past few years have benefited from improving productivity, cheap financing and exposure to faster-growing emerging markets. Most of these firms are in good financial shape. However, now that the U.S. Federal Reserve has begun to raise rates, there is uncertainty as to how monetary policy will be managed and how it might ultimately affect global asset prices--especially considering that valuations across most major asset classes appear to be somewhat stretched.

In Europe, the macroeconomic environment is still relatively weak, but it is improving. After years of deleveraging, Europe began to exhibit loan growth, both from consumers and corporations, in 2015. Partly because of these trends, European equities, as measured by the MSCI Europe Index, have recovered from 2012 lows. For U.S. investors this rally was muted in this fund because of the falling euro against the U.S. dollar, but the Canadian dollar's drop against the greenback has more than compensated.

During the past three years, Japan's stock market has responded very positively to the government's aggressive monetary easing, with the Japanese yen falling about 30% against the U.S. dollar. A weaker yen has been a boon for Japanese exporters, who have since been reporting stronger earnings growth. As firms continue to rally on improving earnings, financial firms have been able to reap higher profits from a stock market boom. However, any sustainable economic growth in Japan will require structural reforms to address Japan's inefficient labour market and corporate Japan's general indifference to shareholder returns. These issues have long been on lawmakers' agendas, and there has been little progress or improvement on these fronts during the past two decades because of strong, entrenched interests. In addition, Japan's aging population and massive 200% debt/GDP ratio are two issues that likely will weigh on its growth in the years to come.

In the emerging markets, the tailwinds from a decade of strong gross domestic product growth and stellar equity market performance have faded. Foreign fund flows have grown more fickle, and countries with weaker fundamentals have experienced higher currency and local stock market volatility. Many emerging-markets countries need to make difficult changes to avoid the middle-income trap and are settling into a period of slower GDP growth in the medium term. By region, Asia appears to be a relative bright spot. Growth in 2015 and 2016 is estimated at around 6%, as emerging Asia benefits from cheaper commodity imports and still-accommodative financial conditions. In contrast, weak commodity markets will likely continue to have a negative impact on Latin America; Brazil expects to see its economy contract by up to 3% in 2016.

Portfolio construction

This exchange-traded fund tracks the FTSE Global All Cap Index, which is a free-float-weighted index of large-, mid- and small-cap companies across industries in nearly all equity markets around the world, including developed and emerging markets. This comprehensive index represents about 98% of the world's total investable stock market capitalization, with the investment amounts adjusted from full market capitalization to reflect limitations on foreign ownership and tradability. The fund follows a representative sampling methodology to replicate the index, holding approximately 7,400 stocks while the index includes about 7,700. Most of the sampling occurs with the smaller index constituents, which tend to be less liquid. Representative sampling can lower trading costs but can result in higher tracking error. Overall, this fund has done a good job of tracking its index.

Fees

With an annual fee of 0.17%, this is one of the most inexpensive funds available for global equity exposure. The U.S. Securities and Exchange Commission requires fund companies to employ fair value pricing for foreign-equity mutual funds (but not ETFs). Because this fund is the ETF share class of the Vanguard Total World Stock mutual fund, Vanguard employs fair value pricing to calculate VT's net asset value. This means it adjusts the fund's NAV to reflect market events that have occurred since the close of foreign markets. This is to ensure that the fund's NAV reflects true value and to minimize arbitrage opportunities for market-timers. There is no adjustment made to the fund's underlying index, so on a day with high market volatility, the fund's NAV may deviate slightly from its index. This difference usually corrects itself when foreign markets reopen. Long-term investors should not be affected by these very small, short-term discrepancies.

Alternatives

A passively managed but non-cap-weighted option is iShares MSCI All Country World Minimum Volatility (ACWV). This fund tracks an index that attempts to create a portfolio of stocks culled from the MSCI All Country World Index that has the lowest absolute volatility with a given set of constraints to maintain country and sector diversification. Low-volatility strategies seek to exploit the observed phenomenon that portfolios with smaller price fluctuations tend to outperform portfolios with larger price fluctuations over the long term. This ETF charges 0.20%.