Investing in global equities

by , 15th October 2017

ETFs are often sold for their simplicity, and in many ways they are simple, but even with ETFs you normally still have to do some asset allocation work. You need to compare the respective merits of different markets and sectors, and then decide how you’re going to ‘weight’ your investment cash. Will you put a big chunk of your cash into US markets or will you make a big bet on China? Or something else completely?

That said, if any of the above scares you, there is one way to simplify the asset allocation process. That’s to put your money in a global ETF that invests in all the major stock markets around the world. Doing that probably won’t give you the optimal asset allocation, but at least it’s nice and simple. And at least it means you won’t fall into the trap of home market bias.  In other words, you won’t have all your money in the London market.

Let’s now take a look the major global stock market indices:

Global indices

  1. MSCI World Index

The name of this index is a little misleading because it doesn’t include emerging market countries. It does, however, include around 1650 stocks drawn from 23 countries.

Here’s a table of the biggest constituents:

Percentage of index broken down by country and sector

Country or Region % of index Sector % of index
US 59% Financial Services 19.2%
Eurozone 12% Technology 15.1%
Japan 8.6% Health 12.4%
UK 6.7% Industrials 11.3%
Europe – excluding eurozone 5.2% Consumer Cyclicals 11.0%

 

The table illustrates the big problem with global index investing. You end up with a large weighting towards US stocks. That reflects the reality that the US stock market is still by far the largest in the world by value.

The index is also biased towards large-caps.

That said, investing in an ETF tracking this index would still diversify you away from the UK market, and most investors should have at least some exposure to US equities. So I think backing this index might work for some people.

If you already have UK exposure in other parts of your portfolio, you might to consider investing in an ETF that tracks the MSCI World ex-UK index. This index just removes the UK stocks from the MSCI World Index.

  1. MSCI ACWI Index (All country World index)

This index is similar to the MSCI World index except it adds in around 850 extra stocks from 24 emerging market countries. Emerging market stocks account for around 12% of the value of the fund.

Percentage of index broken down by country and sector

Country or region % of index Sector % of index
US 52 Financial services 19.4
Eurozone 10.6 Technology 16.6
Japan 7.6 Consumer Cyclicals 11.3
UK 5.8 Healthcare 11.1
Asia – emerging 5.7 Industrials 11

Thanks to the 12% exposure to emerging markets, the index is a bit more diversified than the main MSCI World index. But the US still accounts for more than 50% of the index, which is probably too large a weighting if all your money was invested in this index.

There’s also an ex-UK version of this ACWI index.

  1. FTSE All World index

This index covers both developed and emerging markets. It comprises around 2900 stocks from 47 different countries and represents over 90% of the global stock market.

Percentage of index broken down by country and sector

Country or region % of index Sector % of index
US 51.1 Financial services 19.8
Eurozone 10.7 Technology 16.0
Japan 8.4 Health 11.2
UK 5.9 Consumer Cyclical 10.9
Asia – emerging 5.4 Industrials 10.8

 

  1. Dow Jones Titans 50

This index comprises fifty of the largest global stocks. It’s very heavily slanted towards the US.

Percentage of index broken down by country and sector

Country or region % of index Sector % of index
US 76 Technology 30.8
UK 6.1 Financial services 15.8
Europe – ex eurozone 6.05 Health 14.5
Eurozone 6.05 Consumer defensive 11.3
Asia – developed 3.75 Energy 9.7

 

It’s also worth looking at the five biggest companies in the index. At the top is Apple which comprises 7.2% of the index – that figure suggests that this isn’t a terribly well-diversified index.

Company % of index
Apple 7.2
Microsoft 5.2
Facebook A 3.6
Amazon 3.5
Johnson & Johnson 3.3

Featured ETFs

Let’s now look at some of the leading London-listed global equity ETFs.

  1. Biggest Global Equity ETF: ishares Core MSCI World UCITS ETF (LSE: IWDA) TER: 0.2%

This is a pretty massive fund with almost $12 billion assets under management. The large size means that the bid/offer spread is likely to be tight saving you money when you buy and sell. A tight spread is particularly attractive if you’re likely to trade in and out of this ETF a lot. The 0.2% total expense ratio is also nice and cheap but it’s not the absolute cheapest out there.

The ETF has a strong record of tracking the index effectively. It’s constructed by physical optimisation which means it buys shares in many of the companies in the MSCI World Index but not all of them. Following this strategy makes sense given that there are over 1600 stocks in the index. Lynn Hutchinson of Charles Stanley says that optimisation reduces costs and helps to keep tracking error low.

Hutchinson also pointed out that you can switch between the hedged and unhedged versions of this ETF at a lower than normal cost.

  1. Cheapest Global Equity ETF: HSBC MSCI World UCITS ETF (LSE:HMWO) TER: 0.15%

With a 0.15% TER, this ETF is even cheaper than the Ishares ETF we considered above, and it tracks the same MSCI World index. However, the fund size is a lot smaller – a bit above $300 million – which means the bid/offer spread may often be wider. This fund is also constructed using physical optimisation.

  1. Largest Smart Beta ETF: ishares Edge MSCI World Minimum Volatility (LSE:MVOL) TER 0.3%

This ETF aims to reduce risk by investing mainly in low-volatility stocks in the MSCI World index. Not all the stocks, however, are low-volatility. Some more volatile stocks are included to bring some risk diversification. The TER of 0.3% is low for a Smart Beta ETF.

  1. Featured ETF: iShares Edge MSCI World Value Factor UCITS ETF USD (LSE:IWVL) TER: 0.3%

This ETF tracks the MSCI World Value index. This index comprises 876 value stocks across 23 developed markets. The stocks are selected using three criteria: price to book value, forward price earnings ratio and the dividend yield. The value index has a much higher exposure to Japanese stocks than the main MSCI World index – 26% of the value index is invested in Japanese stocks, with only 38% of the fund invested in US stocks.

The ETF has a relatively low TER of 0.3% and a fund size of over a billion dollars.

If you want to tilt your portfolio towards value, this ETF is a useful tool to do so. There are plenty of value adherents out there who argue that value stocks tend to outperform over the long term, even if that’s not been the case in recent years.

So that’s a round-up of Global equity ETFs. If you’d rather invest in individual countries or regions, you may find the following guides useful:

Investing in Europe

Investing in the US

Investing in emerging market equities

ETF Issuers Featured in this Article