The MSCI World Total Net Return Index includes approximately 85% of the equity market capitalisation of 23 developed-markets countries. As we write, the index is composed of approximately 1,650 stocks. Components must meet minimum criteria for liquidity, as well as foreign ownership restrictions. The securities are weighted by free-float market capitalisation. The index is reviewed and rebalanced quarterly.
The US accounts for approximately 60%-65% the index value, followed by Japan (8%-10%), the UK (6%-8%), and France (3%-5%).
Financial services are 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 0.19%, this 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 due to the quality of portfolio optimisation. But it can also be attributed to the fact that the fund is domiciled in Ireland and enjoys a lower dividend-withholding tax rate in comparison with the index. Besides, albeit on a small scale, the fund 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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The fund uses optimised sampling to replicate the performance of the MSCI World Net Total Return Index. Instead of holding all the index 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 may also hold a small amount of index futures contracts for cash management purposes. Their combined weight is capped at 2% of the portfolio’s value, although internally the target is 1%.
This ETF engages in securities lending to improve performance. Deutsche Bank Agency Securities Lending acts as the lending agent. The fund may lend out a maximum of 50% of its portfolio. As of this review, the annual maximum and average on loan levels were 3.53% and 1.35%, respectively, generating a net return to the fund of 0.01%.
Lending transactions are fully collateralised by taking UCITS-approved quality collateral. The level of overcollateralisation varies in relation to the asset class accepted as collateral. However, it typically is 110% for equity and corporate-bond collateral, 105% for government/supranational bonds, and 100% for cash.
Lending revenue is split 70/30 between the ETF and the lending agent, respectively. Xtrackers fully discloses all details pertaining to securities lending for this ETF in its website.
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This low-cost fund offers a sensible approach to gain exposure to the global equity market.
MSCI World 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 will always have a slight overweighting in large caps at the expense of mid-caps and small caps and an underweighting in emerging markets. Nonetheless, it provides an adequate representation of the opportunity set available to investors.
More important, MSCI World 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-year period. Meanwhile, other funds tracking the same benchmark have delivered similar performance in five- and 10-year periods, with returns ranking in the first quartile.
At 0.19%, the fund is one of the cheapest world-equity exchange-traded funds available. More so, it routinely outperforms both its benchmark and direct competitors. The fund is domiciled in Ireland and so benefits from much lower withholding tax rates on US stocks relative to those factored in for index calculations.
The growth of Xtrackers since its inception has been impressive. From a small team within Deutsche Bank's Investment Banking group, it has developed into one of the largest ETF providers in Europe, offering a broad menu of funds spanning all major asset classes. Along the way, Xtrackers has led its peers in terms of transparency and pragmatism.
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. For these reasons, the fund retains a Morningstar Analyst Rating of Silver.
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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’s overweighting of the US combined with lack of emerging-markets exposure relative to the category has been a drag, but nevertheless, the fund retained is 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 close-to-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’ weights. The MSCI ACWI Index covers approximately 85% of the world’s investable market capitalisation, and the FTSE All-World covers 90%-95%. The FTSE Global All Cap, which also includes emerging-markets exposure, covers close to 99% of the global equity space.
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European investors are offered a wide choice of passive global equity funds.
Like-for-like alternatives in terms of exposure and with excellent tracking records include the iShares Core MSCI World ETF (physical; ongoing charge 0.20%) and the Lyxor MSCI World (synthetic; ongoing charge 0.30%).
For broader market exposure, we find Vanguard Developed World ETF. It tracks the FTSE Developed World Index, which, in comparison to MSCI World, 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. The 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 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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