“VWCE and chill”: Is it the best strategy?

In the world of investing, simplicity often wins. That’s the essence of the “chill” philosophy, which emphasizes a hands-off, stress-free approach. And if you’re looking for an investment that fits this mold, VWCE might be the perfect solution. But what exactly is VWCE, and why is it gaining so much traction among European investors?

In this article, we will explore how VWCE has become synonymous with the “chill” investing strategy, its pros and cons, comparisons with other investment strategies, and alternative solutions. Let’s dive in!

What is VWCE?

VWCE stands for Vanguard FTSE All-World UCITS ETF Accumulation, an Exchange-Traded Fund (ETF) managed by Vanguard, one of the most reputable asset management firms globally. This ETF replicates the FTSE All-World Index, covering a broad spectrum of companies worldwide, including both developed and emerging markets.

Key features of VWCE include (factsheet):

• Asset manager: Vanguard
• Replicated index: FTSE All-World Index
• AUM: +$12B
• Inception date: July 2019
• Fund currency: USD (but it can be traded in EUR)
• Replication: Physical (the ETF holds the actual underlying assets)
• TER: 0.22% p.a.

This ETF performs physical replication, meaning it directly holds the stocks in the benchmark index. As an accumulating ETF, it reinvests dividends instead of distributing them to investors, allowing for compound growth over time.

As of September 2024, VWCE holds ~3,700 stocks, and since its inception, the ETF has delivered a cumulative return of ~70% in EUR, representing a Compound Annual Growth Rate (CAGR) of 11.7%. Given its strong performance since inception, it’s easy to see why VWCE has attracted interest from long-term investors.

The “chill” approach to investing

So, what exactly does “VWCE and chill” mean? This phrase, popularized on platforms like Reddit, refers to a passive, hands-off approach to investing. The idea is simple: instead of actively trading, you invest in a diversified, low-cost ETF like VWCE, set up regular investments (weekly, monthly,…), and let time and compounding work their magic.

The beauty of VWCE lies in its ability to fit perfectly with the “chill” philosophy. Here’s why:

• Global diversification: VWCE covers both developed and emerging markets, spreading your investment across a wide array of companies;
• Accumulative growth: By reinvesting dividends, VWCE allows your investment to grow without the need for constant attention;
• Passive management: The key to the chill approach is to avoid overthinking or actively managing your portfolio. With VWCE, the focus is on long-term growth, with minimal effort on your part.

This strategy is particularly appealing to investors who prefer a “set-it-and-forget-it” method. By contributing regularly through Dollar-Cost Averaging (DCA), you benefit from buying shares regardless of market fluctuations. As the saying goes, time in the market beats timing the market. VWCE allows you to invest without needing to monitor or react to daily market changes, making it ideal for both new and experienced investors.

Is VWCE suitable for every investor?

While VWCE provides global diversification and a simple, hands-off investing approach, it might not be suitable for every type of investor. Different tax rules, risk profiles, and investment goals will be crucial in determining if this fund is the right fit. Below, we explore important considerations like taxes, risk preferences for conservative investors and fees to help assess if VWCE suits your needs.

1. Tax considerations

The tax treatment of accumulating ETFs like VWCE can significantly impact your overall returns, depending on where you reside.

In Germany, investors face a unique tax on unrealized gains known as the Vorabpauschale. This tax applies even if no shares are sold and is based on what you could have earned by investing in a risk-free instrument. For example:

Suppose you start the year with €10,000 invested in VWCE, and by the end of the year, the value rises to €11,000. The tax calculation assumes you could have earned interest at the Basiszins rate (2.55% in 2023), generating €255 in hypothetical earnings. This is then multiplied by a fixed factor of 0.7, resulting in €178.5. You’ll pay a 25% tax on that amount, leading to a tax liability of €44.63, even though the gains remain unrealized.

In other European countries, tax systems can vary, and some may use different methods to tax ETF investments (such as capital gains or wealth taxes). It’s important to check how your country treats accumulating ETFs and whether any local taxes could affect your returns. To make sure you’re compliant and optimizing your investments, it’s a good idea to consult local tax authorities or a financial advisor.

2. Conservative Investors

VWCE is an all-equity ETF, which makes it inherently volatile. For conservative investors who prefer lower risk, VWCE’s lack of bonds can be a significant drawback. Bonds play a crucial role in reducing volatility and stabilizing portfolios, especially during periods of market decline. While equities drive long-term returns, they are also prone to significant drawdowns during economic crises.

A 100% equity strategy, like VWCE, can lead to greater portfolio fluctuations, which might not be suitable for investors nearing retirement or those who need more predictable returns. Adding bonds to your portfolio can help smooth returns and provide a buffer against stock market downturns.

For example, a retiree might want to hold fewer equities and more bonds to reduce the risk of needing to sell stocks during a bear market. You can learn more about balancing stocks and bonds from this insightful video by Ben Felix, which explains the role of bonds in stabilizing portfolios.

3. Fees

Although VWCE offers a low Total Expense Ratio (TER) of 0.22%, it has become one of the most expensive Irish-domiciled global ETFs, which strays from the low-cost principles pioneered by John Bogle, the founder of Vanguard. As fees compound over time, it is important to compare TERs across similar ETFs to ensure you are not overpaying for exposure to global markets.

For example, Invesco offers a similar globally diversified ETF (FWRA) with a lower TER. While this might seem attractive, it’s important to consider other factors, such as fund size and tracking error. Smaller funds can sometimes be less liquid or have higher tracking errors, which may erode returns. You can explore alternatives to VWCE here.

4. Age and time horizon

Age is another key factor when considering VWCE. Younger investors with long-term goals can benefit from VWCE’s equity exposure, as the growth potential outweighs short-term volatility. However, handling market downturns requires discipline, especially with the possibility of a 50% drawdown.

As investors approach retirement, reducing equity exposure and increasing bonds (like VAGF) helps balance risk and provides more stable income. A common approach, known as the glide path, involves gradually shifting from equities to bonds as retirement nears, ensuring portfolio stability during the withdrawal phase.

Who benefits most from VWCE?

VWCE is best suited for:

• Long-term investors: Those with a long investment horizon (10+ years) who are looking for global equity exposure.
• Growth-oriented investors: Investors focused on capital accumulation, as VWCE reinvests dividends instead of distributing them.
• Cost-conscious investors: Despite its slightly higher TER, VWCE is still a low-cost, globally diversified option for passive investors seeking broad market exposure.

Who might consider alternatives?

VWCE may not be the best option for:

• Income-seeking investors: Those looking for regular dividend payouts might prefer a distributing ETF, such as VWRL, which provides cash dividends.
• Conservative investors: Individuals seeking a balanced portfolio with bonds to mitigate risk might find VWCE too volatile.
• Tax-sensitive investors: Investors in countries with complex tax treatments for accumulating ETFs (like Germany) may want to consider distributing ETFs with more favorable tax structures.

By carefully considering these factors, you can determine whether VWCE aligns with your investment strategy or if an alternative approach might be better suited to your financial goals and risk tolerance.

How does VWCE compare to other investment strategies?

When evaluating VWCE against other popular ETFs and investment strategies, it’s important to consider factors like diversification, fees, and performance.

1. VWCE vs IWDA + EMIM

VWCE and IWDA + EMIM are both popular strategies for global investors, but they offer different approaches to diversification and cost-effectiveness. While VWCE is a single ETF providing broad exposure to both developed and emerging markets, the combination of IWDA and EMIM allows for more granular control over your investment mix by separating developed and emerging markets into two ETFs.

Diversification

VWCE tracks the FTSE All-World Index, which includes over 4,000 stocks from both developed and emerging markets. This makes it a convenient one-stop solution for investors seeking broad global exposure.

On the other hand, IWDA follows the MSCI World Index, which covers ~1,500 stocks in developed markets only. To fill this gap, investors can add EMIM, an ETF that focuses on emerging markets, thus achieving a similar level of diversification as VWCE.

Combining IWDA with EMIM results in exposure to over 4,500 stocks, slightly more than VWCE. However, IWDA + EMIM offers more flexibility in managing emerging markets exposure, which could be beneficial if you want to adjust allocations based on market conditions.

TER and Brokerage fees

When comparing VWCE to the IWDA + EMIM combination, it’s essential to consider both the TER and brokerage fees.

On the one hand, the IWDA + EMIM basket offers a slightly lower TER, with IWDA at 0.20% and EMIM at 0.18%. When allocating 88% to IWDA and 12% to EMIM, the combined TER drops just below 0.20%, making it marginally cheaper than VWCE’s 0.22% TER. This small difference could translate into higher long-term returns, especially for large portfolios, as management costs accumulate over time.

On the other hand, managing two separate ETFs like IWDA + EMIM typically requires more trades, increasing brokerage fees for frequent investors. With VWCE, you’re managing just one ETF, reducing the number of transactions and, consequently, lowering costs. For investors making regular, monthly investments, the simplicity of handling a single ETF can help minimize fees and streamline portfolio management.

Simplicity

In terms of simplicity, VWCE has a clear advantage. Investing in a single, globally diversified ETF eliminates the need to rebalance or manage multiple assets.

While IWDA + EMIM allows for more control, it also requires managing the allocation between developed and emerging markets.

With VWCE, you can achieve global diversification without needing to monitor and adjust your portfolio regularly, making it ideal for investors seeking a hands-off, low-maintenance approach.

Performance

Since its launch in July 2019, VWCE’s performance has closely matched that of the IWDA + EMIM basket. In EUR terms, VWCE has delivered a total return of +70.32%, while the IWDA + EMIM combination slightly outperformed with a total return of +75.92%.

This 5.60% difference can largely be attributed to factors like slightly lower management costs for the IWDA + EMIM basket and subtle differences in the allocation between developed and emerging markets.

Here’s an example of the total return in EUR, comparing VWCE to the 0.88*IWDA + 0.12*EMIM allocation basket.

Should you choose VWCE or IWDA + EMIM?

If you’re deciding between VWCE and the IWDA + EMIM combo, consider the following factors to guide your choice:

• Do you prefer more control? IWDA + EMIM allows you to manage your exposure to developed and emerging markets separately, giving you the flexibility to adjust based on market trends. VWCE, on the other hand, offers an all-in-one solution without the need for allocation adjustments.
• Are you focused on costs? The IWDA + EMIM combination has a slightly lower TER (below 0.20%) compared to VWCE’s 0.22%. While this difference is minor, it can lead to slightly higher returns in the long term, particularly for large portfolios.
• How comfortable are you with rebalancing? Managing two ETFs like IWDA + EMIM requires occasional rebalancing, adding complexity but also control. If you prefer a hands-off approach, VWCE’s single ETF structure is easier to maintain without needing frequent adjustments.

Ultimately, if you value flexibility and slightly lower costs, IWDA + EMIM might be the better fit. However, if simplicity and ease of management are your priorities, VWCE is likely the best choice.

2. Sector-focused ETFs

VWCE offers broad exposure to global markets, including both developed and emerging economies. However, sector-focused ETFs provide more concentrated exposure to specific industries such as technology, healthcare, or energy. These ETFs may outperform the global market if their respective sectors experience rapid growth. On the flip side, sector ETFs carry higher risk as they are more vulnerable to downturns in a single industry, which VWCE’s diversification helps mitigate.

For example, an ETF focused on technology stocks might have outperformed VWCE during periods of strong tech growth, but in downturns, such as the 2022 tech sector correction, VWCE’s broader diversification could have offered more stable returns.

Below’s an example of how VWCE compares itself to other technology ETFs like QQQ and SXRV:

3. Portfolio of VWCE + Bonds

Bonds or bond ETFs, such as those tracking government or corporate bonds, are generally considered safer investments compared to equities like VWCE. They tend to provide lower returns but are less volatile and can offer regular income through interest payments.

Total return

VWCE, being 100% equities, does not offer the stability or income stream that a 60% VWCE + 40% VAGF portfolio can provide, but it may deliver higher returns over the long term due to its exposure to global stocks.

Below is an example comparing the total return of VWCE against a 60% VWCE / 40% VAGF investment strategy:

Drawdown

For investors seeking a more balanced approach, combining VWCE with bond ETFs, like VAGF, can offer better risk-adjusted returns by reducing volatility during market downturns while still allowing for equity growth.

When comparing drawdowns, VWCE experienced a larger maximum drawdown of approximately 20%, while the 60% VWCE / 40% VAGF basket had a more moderate maximum drawdown of around 14%, illustrating how bonds can cushion losses in turbulent markets.

Below is the maximum drawdown for VWCE:

Below is the maximum drawdown for a 60% VWCE / 40% VAGF basket:

4. Actively managed portfolios

VWCE is passively managed, meaning it simply tracks the FTSE All-World Index. This keeps costs low (TER of 0.22%), and historical data shows that passive strategies often outperform actively managed funds due to lower fees and reduced market timing risks.

Actively managed portfolios, on the other hand, aim to outperform the market by selecting specific stocks, sectors, or geographies, but this comes with higher management fees and no guarantee of better performance.

Over the long term, passive strategies like VWCE have often matched or outperformed active funds due to these lower costs and consistent market exposure.

5. VWCE vs popular ETFs

Historically, VWCE has delivered robust returns, showing a cumulative gain of +70.32% since its inception in 2019, with a Compound Annual Growth Rate (CAGR) of around 11.7%. Although these results are impressive, other ETFs, like the iShares MSCI World ETF (IWDA) and Vanguard S&P 500 UCITS ETF (VUAA), have exhibited stronger performances in specific periods.

For instance, IWDA, which focuses solely on developed markets, has outperformed with a total return of +79.34%, while VUAA, concentrated on U.S. stocks, has achieved a +76.96% return, reflecting the strength of U.S. tech-driven growth over the past decade.

Despite this, VWCE’s broader diversification, including both developed and emerging markets, makes it a more balanced choice for investors seeking reduced volatility across regions, especially during periods when U.S. markets underperform.

How to incorporate VWCE into a broader portfolio?

VWCE can serve as a core holding in a well-diversified portfolio due to its global equity exposure. However, for many investors, balancing the volatility of an all-equity portfolio with other asset classes, such as bonds, real estate, and alternatives, may provide a smoother return profile and help manage risk over the long term. Below are some strategies to incorporate VWCE into a broader, more diversified portfolio.

1. Combining VWCE with Bonds

For those looking to temper the volatility of equities, blending VWCE with bonds is a popular strategy. The classic 60/40 portfolio, which allocates 60% to equities (like VWCE) and 40% to bonds, is a well-known method for balancing risk and return.

• Bonds offer stability: During periods of market decline, bonds typically provide more stable returns, helping to offset equity losses. In particular, government bonds, like those held in the Vanguard Global Aggregate Bond Fund (VAGF), are considered a safer bet, as they tend to rise when stock markets fall.

By allocating a portion of the portfolio to bonds, investors can reduce volatility while still participating in the growth potential of global equities.

2. Adding REITs or Gold

For more advanced diversification, adding real estate investment trusts (REITs) or gold can further protect against market volatility:

• Real estate: REITs provide exposure to property markets and can generate income through dividends. They also tend to have a low correlation to stocks and bonds, adding protection in volatile markets.
• Gold: Assets like gold are often used as a hedge against inflation and economic downturns. Gold, in particular, tends to hold its value during market sell-offs, making it a valuable addition to a diversified portfolio.

A sample diversified portfolio might include:

• 60% in VWCE (global equities for growth)
• 30% in bonds (for income and stability)
• 10% in alternatives such as REITs or gold (to hedge against market risk and diversify income streams)

3. Cash and risk-free

Incorporating cash or money market funds in a portfolio provides liquidity and a buffer against market volatility. While cash doesn’t generate significant returns, interest on uninvested cash or cash parked in risk-free assets like Treasury bills can earn modest returns, especially in times of rising interest rates. Having a portion of the portfolio in cash allows investors to take advantage of buying opportunities during market downturns without selling other assets at a loss.

Building a balanced Portfolio

By incorporating VWCE into a broader portfolio, investors can benefit from global equity exposure while managing risk through bonds, real estate, commodities like gold, and cash. This diversified approach ensures a smoother investment journey by balancing growth potential with income and stability, making it easier to weather market volatility over the long term.

A well-diversified portfolio might look like this:

• 50-60% VWCE (for global equity exposure and long-term growth)
• 20-30% Bonds (for stability and income, e.g., VAGF)
• 5-10% Alternatives (REITs, gold, or other commodities)
• 5-10% Cash (for liquidity and short-term opportunities)

This allocation provides broad diversification, helping investors balance risk and reward, especially during uncertain market conditions.

What are the risks of the “VWCE and chill” strategy?

While the VWCE and chill strategy offers a simple and diversified approach, it’s important to understand the associated risks that could affect your investment.

1. Market risk and global exposure

   VWCE invests entirely in equities, meaning it is subject to market volatility. If global stock markets decline, VWCE will also experience losses. For investors seeking to mitigate this risk, diversifying into other asset classes, such as bonds or real estate, can provide a buffer, as these assets may perform differently from equities due to their lower correlation.

2. Inflexibility in asset allocation

   With VWCE, you are bound to the allocations defined by the FTSE All-World Index. If you prefer greater exposure to certain regions or currencies (e.g., more European equities or less U.S. dollar exposure), VWCE might not meet your specific needs. This lack of flexibility can be a downside for investors who want more control over their portfolio’s geographic or currency allocation.

3. Currency risk

   Although the underlying assets of VWCE are denominated in USD, the ETF can be traded in euros on European exchanges, such as Xetra. This minimizes currency exchange fees for European investors at the point of purchase. However, the ETF is still exposed to fluctuations in the USD/EUR exchange rate because the fund’s underlying holdings are valued in USD. As a result, even if the ETF performs well, adverse currency movements between the US dollar and the euro could impact your returns when converted back into euros.

4. Lack of control over rebalancing

   Since VWCE follows a fixed index, you cannot manually rebalance your exposure to specific markets or sectors. As you approach your financial goals, you might want to reduce exposure to riskier markets or equities altogether, but this is difficult with a single global fund like VWCE. Investors seeking more dynamic control may need to consider additional or alternative investments to complement VWCE.

5. No regular income dividends

   VWCE is an accumulating ETF, meaning dividends are reinvested rather than distributed to investors. While this allows for compounded growth, it may not be suitable for investors who rely on dividends for regular income. Distributing ETFs like VWRL might be a better choice for those seeking cash flow.

Best trading platforms to invest in VWCE

When it comes to investing in ETFs, including the VWCE, choosing the right platform can make a significant difference in your investment journey. To help you find the best platform that suits your needs, we’ve compared the best ETF brokers in Europe. From low-cost options to platforms with a wide range of ETFs, you’ll find everything you need to make an informed decision.

Bottom line

In conclusion, VWCE is a great option for investors looking to adopt a passive, hands-off approach to global investing. Whether you’re just starting or have years of experience, VWCE offers simplicity and peace of mind, allowing you to focus on your long-term goals rather than short-term market fluctuations.

However, like any investment, it’s important to consider how it fits within your financial goals and risk tolerance. If you prefer slightly lower fees and a potential for higher returns, the IWDA + EMIM combination could be appealing with its marginally lower TER and slightly better historical performance. Additionally, if you seek more balance and lower volatility, incorporating a 60/40 portfolio with bond ETFs like VAGF may help reduce risk while maintaining growth potential.

Ultimately, the choice between VWCE and alternatives will depend on how much flexibility, control, and simplicity you want in managing your portfolio.

If you need further guidance or have questions, feel free to reach out to us. We wish you the best in your investment journey!

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