The MSCI World Total Net Return Index includes approximately 85% of the equity market cap of 23 developed-markets countries. As we write, the index is composed of approximately 1,650 stocks. Constituents must meet minimum criteria for liquidity, as well as foreign ownership restrictions. The securities are weighted by free-float market cap. The index is reviewed and rebalanced quarterly.
The US accounts for approximately 60%-65% the index value, followed by Japan (8%-10%), the United Kingdom (6%-8%), and France (3%-5%).
Financial services is the index’s largest sector, with a 18%-20% weighting, followed by information technology (17%-19%) and healthcare (11%-13%).
Portfolio concentration is very limited, with the top 10 holdings accounting for 10%-12% of the total index value.
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With an ongoing charge of 0.20%, this ETF is one of the cheapest MSCI World ETFs available.
Index funds should provide the returns of their benchmark, less fees. However, the fund typically outperforms its benchmark. This is partly because of the quality of portfolio optimisation. But it can also be attributed to the fact that the fund is domiciled in Ireland and benefits from a lower dividend-withholding tax rate on US stocks than the one used for index calculations. The fund also benefits from securities-lending revenues.
The fund’s annualised tracking error has been relatively low. Tracking error is a measure of how consistently a fund tracks its benchmark index. The closer the tracking error is to zero, the better or more efficient the fund is.
Investors should also consider trading costs, including bid-ask spreads and brokerage fees, when buying and selling the ETF.
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IShares uses physical optimised replication to replicate the performance of the MSCI World Total Net Return Index. Instead of holding all the index’s constituents in the same weightings, the fund holds a sample basket of securities that reflects the return and risk characteristics of the index. While this replication method helps minimise trading costs, it can create tracking error. The fund uses futures for cash management purposes. This is standard practice and helps limit tracking error.
IShares engages in securities lending and can lend up to 100% of the securities within the fund to improve its performance. The gross revenue generated from this activity is split 62.5/37.5 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. The fund lent out 10.5% on average, generated 0.03% net income, and had 13.4% of the portfolio maximum on-loan over the past 12 months ended December 2018. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary between 102.5% and 112% of the value of the securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk-mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification agreement is subject to changes, in some cases without notice.
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IShares Core MSCI World offers a low-cost, sensible approach to gain exposure to the global equity market. The fund retains its Morningstar Analyst Rating of Silver.
This exchange-traded fund aims to represent around 85% of the global developed equity market. Compared with the average offering in the global large-blend Morningstar Category, which includes both active and passive funds, the MSCI World Index has a slight overweighting in mid-caps at the expense of giant and large caps, and an underweighting in emerging markets. Nonetheless, it provides an adequate representation of the opportunity set available to investors.
More important, it has proved difficult to beat by active managers over time. Relative to category peers, inclusive of active mandates, the fund has delivered above-average risk-adjusted performance in the past trailing three- and five-year periods. Other funds tracking the same benchmark have delivered similar performances over a 10-year period, with returns ranking in the first quartile.
At 0.20%, this is one of the cheapest world equity ETFs available. More so, it routinely outperforms both its benchmark and direct competitors. The fund is domiciled in Ireland and so benefits from a lower withholding tax rate on US stocks relative to that used for index calculations.
IShares has a seasoned portfolio management team befitting its position as dominant ETF provider in Europe. The team leverages market-leading technology.
Overall, we have a positive view of the strategy as defined by the index. The fund is one of the cheapest and best-performing options, which makes us very confident in its ability to deliver returns above the category average.
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This MSCI World Index is made up of large- and mid-cap companies and excludes small- and micro-cap companies.
About 60% of the fund's assets are invested in stocks listed in the United States. It also has significant exposure to Japanese stocks, which account for about 8% of the portfolio. But the countries where the fund’s holdings are listed are not necessarily indicative of the portfolio's economic exposure. While most of these firms do a lot of business in their own countries, the largest holdings tend to have global operations.
The MSCI World Index’s overweighting in the US, combined with lack of emerging-markets exposure relative to the category, have been a drag, but the fund nevertheless retained its position as a top performer over the past three years. In addition, as this is an index fund, its portfolio managers keep the fund fully invested at all times, which provided a tailwind relative to the category over the past five-year bull market. However, maintaining a near-zero allocation to cash has the opposite effect in falling markets and might cause the fund to underperform its category peers.
Market-cap weighting skews the portfolio toward the largest stocks in the world, such as Apple, Microsoft, Amazon.com, and Facebook. But the average market cap of the fund's holdings is like the category norm. There are no limits on sector or country weightings, but the fund's broad reach helps diversify risk. It includes approximately 1,630 stocks, and the top 10 holdings represent only 12% of its assets.
Many of the fund's holdings enjoy durable competitive advantages. Of the holdings Morningstar equity analysts cover, 81% by market value carried a Morningstar Economic Moat Rating of either wide or narrow at the end of January 2019, which was comparable to the category average.
Investors looking for more-comprehensive exposure to global equities, including emerging markets, can choose broader indexes such as MSCI All-Country World Index or FTSE All-World Index. Emerging-markets stocks constitute around 10% of these indexes’ weightings. The MSCI ACWI covers approximately 85% of the world’s investable market cap, and the FTSE All-World Index covers 90%-95%. The FTSE Global All Cap Index, which also includes emerging-markets exposure, covers close to 99% of the global equity space.
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European investors are offered wide choice of passive global equity funds.
Like-for-like alternatives in terms of exposure and with an excellent tracking record include Lyxor MSCI World (synthetic; ongoing charge 0.30%) and Xtrackers MSCI World (DR) (physical; ongoing charge: 0.19%).
Offering broader market exposure, we find Vanguard Developed World ETF. It tracks the FTSE Developed World Index, which in comparison to the MSCI World Index, includes around 500 small-cap stocks. Moreover, its low ongoing charge of 0.18% gives this fund a significant advantage versus its category peers over the long haul.
Also available are funds offering exposure to both developed and emerging economies. Vanguard FTSE All-World ETF (ongoing charge: 0.25%) is the cheapest (in terms of fees) and provides the broadest coverage. As such, it may represent a better option than MSCI ACWI ETFs, all of which we believe are expensive. The FTSE All-World Index offers access to approximately 90%-95% of the world’s investable market capitalisation, against 85% for the MSCI ACWI. Emerging countries account for approximately 8%-10% of the exposure.
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