The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

For the past three months, the MSCI World index has been posting losses. The index is one of the most important building blocks for long-term equity savers.

The MSCI World is something like the Nissan Cube of exchange-traded index funds (ETFs). If you do not want to deal with the stock market on a regular basis, but want to spread your money widely and are looking for a general investment opportunity, you usually rely on the World index.

This popular ETF contains the shares of the 1,510 largest publicly-traded companies from 23 developed countries. This allows investors to participate in the opportunities of the global market with little financial investment and manageable risk. Even if one of the stocks included in the index crashes, you will feel little impact on the total return, which has averaged around 9 percent per year in recent years.

But in recent months criticism of the World index has intensified. A look at the weighting shows that, although there is a broad spread across 23 industrialised countries and many different industries, US companies now make up by far the largest share. The ten largest companies in the “World” index by market value are all from the US. These are Apple, Microsoft, Amazon, Nvidia, Alphabet A & B, Tesla, Exxon and UnitedHealth. These ten US companies alone account for 20.12 percent of the index. As a result, investors participate more in price fluctuations that specifically affect the US market. If you invest in the MSCI World, you are automatically betting on the long-term success of ‘Big Tech’ in the US. This annoys many investors who want to benefit from the global economy and spread their money more widely. As long as the MSCI World was successful, this was considered a shortcoming, but the gains pushed the objections into the background. Now the index is weakening, and criticism is getting louder.

Many investors wonder if the MSCI World still reflects what it claims to be. The fact is that the US has experienced an unprecedented stock market boom in recent years, and is therefore providing a lot of capital. If you want to invest in global economic growth or the development of corporate earnings with the help of equities, most of your investment is in US equities and concentrated in the seven major US technology stocks.

Since 1975, five years after the index was first calculated, the average return was around 9 percent per year. Over the past ten years, it has even increased by an average of one percentage point. However, the index is currently in a phase of weakness and, since its high for the year on August 1, the MSCI World has lost almost 8 percent.

But it is a rather bad idea to exit immediately in phases of weakness. In 2018, investors had to accept losses of around 8 percent but, in the following three years, the index posted clear double digit gains in each of the following three years. So it is the long-term average return that counts, not a single year’s return.

If you do not want to come to terms with the strong overweight of US equities in the MSCI World, you can invest in variations of it. Alternatives include the MSCI All Countries World Index (MSCI ACWI), which contains around twice as many, namely 3,000 companies, from 23 developed countries and 27 emerging markets. Look for these ETFs on our ActivTrader platform.