The MSCI World is the standard for world ETFs although it contains only 23 countries and is 70 percent US stocks. How the index works, which criticism is justified and which alternatives exist.
In short
- Around 1,400 stocks from 23 developed countries, weighted by market value; USA around 70 percent, Japan 6, UK 4, Germany 2.5.
- No emerging markets, no small caps: the MSCI ACWI IMI or FTSE All-World fill the gap.
- Long-term return since 1970 around 7 to 8 percent a year in euros, with drawdowns up to 55 percent.
- Concentration: the ten largest companies make up over 25 percent, almost all US technology.
How the index is built
MSCI, a US index provider, selects from 23 developed countries the largest and mid-sized listed companies that together cover around 85 percent of each market. Weighting follows free-float market value: a company worth three trillion dollars weighs ten times one worth 300 billion. The index is reviewed four times a year; risers come in, fallers drop out. An ETF on it buys the stocks in exactly this proportion.
What is in it
Around 1,400 stocks, about 600 of them from the US with around 70 percent weight, Japan 6 percent, UK 4, Canada and France 3 each, Germany and Switzerland 2.5 each. By sector: technology around 25 percent, financials 15, healthcare 11, industrials 11, consumer discretionary 10. The ten largest companies, almost all American technology groups, make up more than a quarter of the index.
What is missing
Emerging markets such as China, India, Taiwan, Korea and Brazil, which make up around ten percent of the world market; they sit in the MSCI Emerging Markets. Small companies under roughly two billion of market value; they sit in the MSCI World Small Cap. Whoever wants everything takes the MSCI ACWI IMI with around 9,000 stocks or the FTSE All-World with around 3,600, which at least includes emerging markets.
The criticism
US concentration: 70 percent US is a lot, but it is the world’s market value. Whoever wants less US adds Europe or equal-weighted indices and thereby bets against the market. Tech concentration: it is the highest since the 1970s; whether that is a risk or reality nobody knows. Market cap buys expensive stocks: yes, but all alternatives have not done better over long periods, only differently.
The return
Since 1970 around 7 to 8 percent a year in euros including dividends, before inflation. In between: minus 55 percent from 2000 to 2003, minus 50 percent in 2008, minus 34 percent in spring 2020, minus 20 percent in 2022. Every 15-year period ended positive, not every 5-year period. That is the fee for the return.
Which ETF to take
For the MSCI World there are around 20 ETFs in Europe that differ in costs (0.12 to 0.2 percent), use of income, domicile and size. For investors who want one index, the FTSE All-World is the more complete choice; for those who want to steer developed and emerging markets separately, MSCI World plus Emerging Markets at 80 to 20 or 90 to 10.
Frequently asked questions
Is the MSCI World sustainable?
No, it contains everything. The SRI and ESG variants exclude weapons, tobacco and coal and have performed similarly over the last ten years with fewer stocks.
MSCI World or FTSE All-World?
Both are good cores. All-World includes emerging markets, is therefore broader and saves a second ETF.
What about a Europe share?
Europe sits in the MSCI World at around 15 percent. Whoever wants more bets on Europe; historically that has been a disadvantage since 2010, which says nothing about the future.
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