What is SPWO? (Pros, Cons, and Strategies)

If you're looking to diversify your investment portfolio away from U.S. stocks, SPWO (SP Funds S&P World (ex-US) ETF) could be an interesting choice. In this blog post, we'll explore what SPWO is, its advantages, disadvantages, and some effective strategies to maximize its potential.

What is SPWO?

SPWO is an Exchange-Traded Fund (ETF) that focuses on global markets, excluding the United States. Managed by SP Funds, SPWO tracks the S&P Developed Ex-US BMI Plus Shariah Index. This means it provides exposure to international companies that adhere to Shariah-compliant principles.

Key Features of SPWO

• Global Diversification: Offers exposure to developed markets outside the U.S.
• Shariah Compliance: Invests in companies that meet specific ethical standards outlined by Islamic finance.
• Broad Market Coverage: Includes a comprehensive range of sectors, from technology to healthcare and consumer goods.

SPWO Composition

SPWO comprises global companies primarily from Europe, Japan, and other developed markets, avoiding those that derive significant income from prohibited activities like alcohol, gambling, or interest-based finance. Major holdings often include companies like Nestle, Toyota, and Samsung.

Pros of SPWO

International Diversification

By investing in SPWO, you're spreading your risk across multiple countries and continents. This diversification can be particularly beneficial if the U.S. market faces downturns, as global markets often do not correlate perfectly with U.S. market movements.

Ethical Investing

SPWO follows Shariah-compliant guidelines, which means that it aligns with ethical investing principles not just for Muslim investors but for anyone looking to avoid "sin stocks" (such as tobacco, alcohol, and gambling companies).

Stability in Developed Markets

SPWO primarily focuses on developed international markets, which tend to be more stable and less volatile than emerging markets. This makes SPWO an attractive option for conservative investors.

Cons of SPWO

Shariah Compliance Limits

SPWO's adherence to Shariah compliance means it excludes certain sectors, which could limit growth opportunities during periods when these sectors perform well.

Exposure to Currency Risk

As SPWO invests in international markets, it exposes investors to currency exchange rate fluctuations, which can impact returns. If the U.S. dollar strengthens, your returns could diminish simply due to unfavorable currency conversions.

Higher Expense Ratio

Compared to some domestic ETFs, SPWO has a relatively higher expense ratio. This could slightly eat into your overall returns, particularly over the long term.

SPWO Investment Strategies

Long-term Investment Strategy

Given its focus on stable, developed markets and ethical investment principles, SPWO is well-suited for long-term investors. By holding SPWO for an extended period, you can potentially benefit from stable growth and diversification, helping to balance your overall portfolio.

Dollar-Cost Averaging

By regularly investing a fixed amount in SPWO, you can take advantage of dollar-cost averaging. This strategy involves buying more shares when prices are low and fewer when prices are high, which can help mitigate the risk of market volatility.

Use as a Diversification Tool

SPWO can serve as an excellent diversification tool for U.S.-centric portfolios. By adding an international element, you can reduce the overall risk and increase the potential for growth by capturing global market performances.

Rebalancing Your Portfolio

Include SPWO as part of a broader portfolio strategy to maintain a balanced allocation. Regularly rebalancing your portfolio can help maintain your desired level of risk and return. For instance, if your international holdings grow much faster than your U.S. stocks, you may need to sell some shares of SPWO to keep your portfolio balanced.

Ethical and Impact Investing

If you have a focus on ethical or impact investing, SPWO is a fitting choice. Its Shariah-compliant nature ensures you're invested in companies that align with certain ethical standards, which can be a critical factor for socially conscious investors.

Conclusion

SPWO (SP Funds S&P World (ex-US) ETF) offers an interesting opportunity for investors looking to diversify internationally while adhering to ethical investment principles. With well-balanced exposure to developed markets, SPWO presents a relatively stable investment option. However, its higher expense ratio and limited sector exposure due to Shariah compliance are things to consider. By employing long-term strategies, dollar-cost averaging, and regular portfolio rebalancing, SPWO can be a valuable addition to your investment toolkit.