Investing in global stock indices is one of the best ways to invest in the stock market. To do it successfully, we need to be familiar with the different types of global stock indices available.
- Global Stock Indices of Develop Markets (MSCI World)
- Global Stock Indices of Emerging Markets (MSCI Emerging Markets)
- Truly Global Stock Indices (MSCI ACWI)
The idea of passive investing is that we do not want to choose the individual stocks we will invest in, but instead buy the entire stock market. For practical purposes, the entire market means investing in all companies that are part of a broad stock market index.
Passive investing is based on the idea that it is not possible to consistently outperform the general market. Consequently, it makes more sense to simply track the market with a low-cost investment vehicle.
Although it is true that passive investing frees us from having to pick individual stocks, we still have to pick which ETF we want to invest in. Therefore, it is key to select an ETF that tracks the stock market index that suits out investment goals.
A stock index can be a good representation of a country’s stock market. But investing in individual countries still forces us to decide which countries we want to invest in.
As a consequence of all that, one of the best ways to invest passively in the stock market is to track a global index. Instead of investing in the stock markets of a handful of countries, we buy stocks all over the world.
There are many global stock indices available. The most representative ones can be classified into three main categories: indices composed of developed countries, indices composed of emerging countries, and indices composed of both developed and emerging countries.
Next, we analyze the three types of global stock indices. We comment on their main characteristics, advantages and disadvantages.
Global Stock Indices of Develop Markets (MSCI World)
The MSCI World is probably the most famous global stock index. Curiously, it is not a truly global index since it is only composed of developed countries.
Because global stock markets are heavily dominated by developed countries, most investors are happy investing in the MSCI World as a proxy for the global economy. However, it is worth noting that emerging markets are not included in this index.
One of the criticisms about the MSCI World is that the United States has an excessive weight in it, representing close to 70% of the index’s market capitalization. Therefore, though we may think that our investment is geographically diversified, two thirds of its will be concentrated in the United States.
This is the reason why the MSCI World is so heavily correlated with the S&P 500.
Other countries with a considerable weight in the index are Japan, the United Kingdom, France, Germany and Switzerland. Though their weights are obviously very modest compared to the United States.
An index of developed countries can add stability and diversification to our portfolio. This is especially true if we compare it with US-only indices such as the S&P 500.
For additional information about this index, here is the link to the official website of MSCI.
Global Stock Indices of Emerging Markets (MSCI Emerging Markets)
For those investors who are optimistic about the future of emerging countries and want to benefit from their high rates of economic growth, it is also possible to invest in them through global stock indices. The most famous of those indices is the MSCI Emerging Markets.
This option is easier than investing in single-country emerging markets indices, especially considering their performance tends to be either very good or very poor.
In the case of the MSCI Emerging Markets, similar to what happens with the MSCI World, the countries with the largest stock markets are the ones that receive the largest weighs in the index.
Just over a third of the market capitalization of the MSCI Emerging Markets is in China and Hong Kong. Other countries with significant weights are Taiwan, South Korea, India and Brazil. Russia was removed from the index in 2022.
As you can see, the MSCI Emerging Markets index is highly dominated by Asian countries. Another important aspect is that the technology sector is the one most represented.
Some readers may be surprised to learn that South Korea or Taiwan are on the Emerging Markets index, since they are prosperous and highly developed countries.
However, because their financial markets are not as open to foreign investors as those of other countries, MSCI, the company in charge of producing and calculating these indices, still categorizes these countries as emerging markets.
If you are interested to learn more about the MSCI Emerging Markets index, check out this link.
Truly Global Stock Indices (MSCI ACWI)
Those individuals interested in investing in all countries in the world, both developed and emerging, can take a look at the MSCI ACWI Index.
ACWI is the acronym for All Country World Index. Obviously, not all countries in the world are included. Countries may be missing because they have no proper stock exchanges (like Cuba and North Korea), their stock market is too small (like Algeria and Kenya) or are subject to sanctions (like Russia and Iran).
A country is represented if any of its listed companies meets all criteria to join the global index.
In terms of how the index is constructed, it is a merge of the MSCI World and MSCI Emerging Markets indices. But, instead of each of those two indices representing 50% of the ACWI index, the weighting is done based on market capitalization.
As a consequence of that, if we look at the country allocations, we will notice that the US stock market still heavily dominates this global stock index. About 60% of the MSCI ACWI’s market capitalization is represented by US stocks. All other countries combined make up about 40% of the MSCI ACWI index.
Of those countries, China, Japan, the United Kingdom, France, Germany, Switzerland and Taiwan have significant representations.
If you would like to better understand the proportion between developed markets and emerging markets in the ACWI index, depending on when we invest, developed markets will make up between 85-90% of the index and emerging markets between 10-15%.
More details about the MSCI ACWI index can be found on its official website.
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And if you would like to learn about the most important stock indexes of the largest emerging country, check out this link:
Top 10 Stock Market Indices in China
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