The stock markets of developed countries are where most of the world’s large companies trade. Investing in all of them simultaneously is synonymous with diversification. In this post, we analyze the 5 most important world stock indices for developed countries.
The rise in popularity of exchange traded funds over the past few decades has made it easier to invest in international stock markets. As a consequence of that, global investment funds have appeared and become one of the best investment alternatives.
Because not all equity markets are equally large or developed, and because liquidity levels and regulation are very heterogeneous, countries are typically classified into three distinct categories: developed markets, emerging markets, and frontier markets.
Developed markets are those with the most advanced stock exchanges, the most liquidity and a more solid regulatory framework. They are also where most of the world’s large companies are listed. Hence, many global equity funds only invest in this type of markets.
But not all world stock indices are the same. For example, the number of countries included may vary. This is because each company that publishes stock indices uses different criteria.
As a general rule, the developed countries include Western Europe, the United States and Canada, Australia and New Zealand, as well as some of the most advanced economies in Asia. Given the gigantic size of the US stock market relative to the rest, it should be noted that it plays a dominant role even when we take the stock markets of all developed markets.
For those who want to invest in global equity funds, without having to take any exposure to emerging countries, we will analyze the 5 most important world stock market indices for developed markets.
The MSCI World is one of the most famous global stock indices. Although it contains the word World in its name, the truth is that it only includes developed markets.
Within the index, we find many large and mid-cap stocks from all these developed countries. In total, some 1,500 stocks are part of the MSCI World.
The weighting of companies within the index is carried out based on their market capitalization adjusted for free float. As a result, it is the larger ones that tend to dominate.
Corporations such as Apple, Microsoft, Amazon or Exxon Mobil are among the most important. LVMH and Nestlé are two of the most heavily-weighted European companies in the MSCI World.
One of the disadvantages of the MSCI World is its small exposure to the economies of Asia and the Pacific area. Leaving aside Australia and New Zealand, as well as Israel, only three Asian economies are considered developed within the MSCI indices.
These three Asian economies are Japan, Hong Kong and Singapore. And because of the small size of companies from Hong Kong and Singapore, Japan is really the only large Asian country that is included in the MSCI World. This is because most large companies listed on the Hong Kong Stock Exchange are considered Chinese and part of emerging market indices.
You can find more details about the MSCI World on its official website.
MSCI World IMI
Another index calculated by MSCI is the MSCI World IMI, which is very similar to the MSCI World. Both indices use the same criteria to select stocks and weight them, which means they have companies from the same countries.
The big difference lies in the fact that the MSCI World IMI also includes companies with a small market capitalization, thus having a very large number of constituents. In total, about 6,000 stocks are part of this index.
Although the correlation between both indices is very high, the MSCI World IMI can be a good alternative for those who want their capital to also be invested in small-cap companies.
You can find more details about it on the MSCI website.
S&P Developed BMI
The S&P Developed BMI is a stock market index calculated by S&P Dow Jones. It includes all companies from developed countries that meet the minimum size and liquidity criteria. In total, nearly 9,000 stocks are part of the index, making it the most inclusive alternative regarding small-cap stocks.
The weighting of the companies is carried out based on their market capitalization adjusted for free float.
An interesting difference between this index and MSCI’s indices is that the S&P Developed BMI includes both South Korea and Poland.
While the Polish stock market is relatively small, the size of the South Korean is considerable. In fact, it is one of the 10 largest in the world. And it contains important companies, such as Samsung.
Hence, if you want to be exposed to both the South Korean economy and smaller companies in developed countries, the S&P Developed BMI is a good option. You can find more information about this index on the S&P website.
The FTSE Developed is a stock market index calculated by FTSE Russell. It shares characteristics with both the MSCI World and the S&P Developed BMI.
It is composed of companies from about 25 developed countries. These are the same countries that can be found in the S&P Developed BMI, which means that both South Korea and Poland are included.
In terms of criteria for selecting stocks, the FTSE Developed is closer to the MSCI World, requiring a higher minimum market capitalisation. As a result, this index includes just over 2,000 companies. These are large and medium-sized corporations.
If you want to read more details about the FTSE Developed, you can visit its official website.
FTSE EPRA Nareit Developed
Finally, due to the great interest in real estate assets on the part of many investors, we will take a look at the FTSE EPRA Nareit Developed index. This index is made up of real estate investment companies from developed countries.
Many of these companies are incorporated in the form of REITs, which offers tax advantages in many countries. But real estate companies from countries that do not contemplate the figure of REIT are also included.
Within the index, we find companies from the 25 countries considered developed by FTSE Russell. As with the most general stock indices, the United States is the country with the largest allocation.
An ETF tracking this index can be a diversified option for those investors looking to generate passive income from real estate on a regular basis. Here is the link to the official website of the index.
I hope you found this analysis of the types of global stock indices useful, and encourage you to subscribe to my newsletter:
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