MSCI Index ETF : World Focus (ACWI)

May 05, 2010 in Country Funds | Strategy

The MSCI Index ETF list is quite useful as a starting point for ways to think about the global investment landscape.  Moving from a domestic to a world focus expands the individual equity universe to well north of 8,000 securities (vs the typical Russell 1000 focus of domestic managers). Global exports are increasing on a secular basis as the world increasingly trades goods and services with each other ---- globalization is unstoppable.

Ironically, I say all of this as our models have been favoring domestic over international ETFs for months now and being short (or avoiding) Europe in particular seems like more than just a short-term trade.

Nevertheless, over the long-run it makes sense that more choices will offer diversification benefits in terms of enhancing return (long and short) and likely reducing risk (though this benefit becomes less as globalization increases).  Without going into a long dissertation on this topic, I will just instead show the current relative valuations of the MSCI World Index ETF (ACWI).   

MSCI Index ETF ACWI Weightings


Note that approximately 2/3 of this index is in the United States and Europe.   It is not AS out of balance as it may at first seem as companies like those in China have very low profit margins. In the U.S., a company like Google might not contribute a lot to GDP – but it does have very high overall profits.   Conversely, Wal-Mart contributes a lot to U.S. GDP but has very low margins – and China supplies Wal-Mart so you can imagine how their profit margins look.    So each country will have GDP changes and profit margin cycles to think about --- its not JUST about GDP growth and population trends.   

Over the very long-run though, these world weightings will likely change in favor of countries with stronger demographics --- (the above chart should only be viewed as a snapshot in time).  Importantly, it is not going to be a smooth ride -- even as it seems obvious that countries like China and India grow to be much higher percentages of the total.  

The next chart from the ETF Portfolios page re-creates the MSCI World Index ETF as a sanity check.  We can do this with regional and country funds.   It won’t be perfect because there are some anomalies with indexes regarding 'sampling' and starting vs ending weights etc.…



So within the context of a dynamic and volatile global marketplace, is based upon – finding quantifiable, back-testable methods to help the investor think about balancing reward and risk.  In other words,  to participate in global strength and to avoid/underweight/short regions of the world showing global weakness.  There will be many large corrections within secular themes.  You need to protect yourself by balancing the longer-term demographic trends with the realities of extremely volatile markets.  This is doable -- so long as you show proper respect for the markets inherent volatility.  

Finally, here is a look at our ETF Screener.    The ‘ Selected Betas’ grouping has most of these indexes scattered within it.  We don’t think its complete to just look at regions of the world --- we like to view Relative Strength across asset-classes as well, not just equities.   Note here that this is not properly done unless you are tracking total return  --- dividends and distributions can make a significant difference in your screens and models.  You need clean data to properly calculate relative strength -- especially across asset classes. As experienced professionals, we want to stress the relative benefit of a well-maintained total return database of 400 ETF's --- vs a 15,000 security database that simply reports trading numbers and ignores total return.  We have intentionally created a focused environment (based on ETFs) to minimize the data integrity issues that can greatly affect financial models.    

Details are important.   We cannot be perfect -- but we know that simply ignoring the issue (as others do) is particularly disingenuous.  ETFs are based on indexes.  Index returns are ALWAYS based on total return.  Price alone does not reflect total return, adjustments are needed.  We make these adjustments so you don't have to... 


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