Fund Focus: an ETF portfolio to beat the market?

Fans of tracker funds have gotten used to a weary narrative over the last decade: that a “global” index such as the MSCI World is largely a bet on the US, and mainly on a handful of massive US companies. 

To complicate affairs, those big companies, and the S&P 500, have tended to lead the way by returns.

The last year has turned that narrative on its head somewhat, with other equity regions generating big returns. 

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The S&P 500 has still done very well but we have actually seen much greater returns from the emerging markets and Japan, while the UK and Europe have produced some lesser but still very strong gains.

Concerns about the US market continue to mount, be it via worries about artificial intelligence (AI) capital spending, market valuations or the potential for some frothy initial public offerings (IPOs) this year.

With that in mind, it’s worth asking whether a more diversified global portfolio would still deliver the goods, and whether that can be done using tracker funds. An experiment on my part suggests that has recently been the case.

An ETF portfolio to cover the world

The Vanguard FTSE All-World ETF USD Acc GBP (LSE:VWRP) was the most popular exchange-traded funds (ETF) among ii customers in May (if we exclude regular investing) and, with more than 3,700 holdings, it looks pretty diversified at first glance.

But investors are putting a lot of faith in the US market, which accounts for a little more than 60% of the portfolio. Europe makes up around 14% of the fund, with modest allocations beyond that to the UK, China, Taiwan and South Korea.

As an alternative, I decided to build a more global, diversified portfolio using a handful of ETFs to cover the “main” equity markets. 

This dummy portfolio had a fifth of its assets apiece in the iShares Core FTSE 100 ETF GBP Acc GBP (LSE:CUKX), the iShares Core S&P 500 ETF USD Acc GBP (LSE:CSP1), the iShares Core MSCI EM IMI ETF USD Acc GBP (LSE:EMIM), the iShares Nikkei 225 ETF JPY Acc GBP (LSE:CNKY) to cover Japan, and the Vanguard FTSE Dev Eurp ex UK ETF Acc GBP (LSE:VERG). 

I’ve gone with cheap options from big providers for argument’s sake, but it’s possible that you can find funds that look even cheaper (or seem like a better play on the main markets).

While we have no idea what the future might hold, I’ve backtested the portfolio’s performance versus the FTSE All World tracker. And the results, for now, are encouraging.

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The results

The FTSE All World fund has rewarded investors richly over the last five years, handing them a sterling total return of roughly 80%. 

But what’s impressive is that the global ETF portfolio has almost matched it over the same period, falling a few percentage points behind. That’s not a bad sacrifice for someone who wants better diversification.

Both options are meanwhile pretty comfortably ahead of the average global fund and global investment trust - although the first group (the IA Global sector) is pretty disparate.

Source: FE Analytics. Past performance is not a guide to future performance.

We should acknowledge the fact that the ETF portfolio has made a lot of progress very recently: it has returned around 16% so far in 2026 (versus 12.2% for the FTSE All World ETF) and made almost 19% in 2025 (versus 14%). 

It lagged the FTSE All World fund more notably in 2024, 2023 and 2021 – but still posted good returns and struggled slightly less in the sell-off of 2022.

All this shows that a more diversified approach can work, without adding too much extra complexity. 

There are just a couple of considerations: you might need to shop around more to build a portfolio of five funds, and you will need to remember to rebalance back to your original allocations every six months or so by selling winners and deploying cash into “losers”.

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Enormous returns from the emerging markets and Japan ETFs in the last year, for example, would leave them on bigger weightings in your portfolio than the others. If that carries on to an extreme level, it could erode the diversification the portfolio was built for.

With markets at seemingly high valuations and the heady AI narrative as present in the emerging markets as it is in the US, we could always see the major stock markets fall in tandem at some point. 

There’s then a question of whether you diversify even further into unpredictable “safe haven” assets, from bonds and gold to infrastructure, as a hedge, or simply ride the markets down and keep investing.

But either way this portfolio seems to deliver good returns with much broader diversification. It could work as a hands-off investment with the benefit of a little more thought.