MSCI World Doubles Return of ex-US Equivalent Since 2000

The "Magnificent Seven" make up almost a fifth of the parent MSCI World Index.

The popular MSCI World Index has booked nearly twice the return of the MSCI World ex USA index since the year 2000, underlining the dominance the largest equity market has established over other companies around the globe.

Between the turn of the millennium and Nov. 24, the parent index boasted a convincing 87-percentage point lead over its ex-U.S. counterpart with gains of 212% and 125%, respectively.

The two indexes spent most of the first 13 years on either a level footing or the ex-U.S. benchmark leading—at one point gaining a 20-percentage point advantage in the second half of 2007 as emerging-market equities outperformed developed markets in the run-up to the global financial crisis.

However, the historical leadership of U.S. equities re-established itself starting in 2013, following the establishment of the post-financial crisis monetary policy paradigm of low interest rates.

Whereas higher rates force unprofitable or debt-laden companies to discount future cash flows, lower rates mean borrowing costs are lower and future expected profits are more attractive.

That laid the foundations for a decade-long broad tech rally that pre-dot-com bubble investors had envisaged some 20 years prior.

A key turning point was August 2012, when Apple Inc. overtook Exxon Mobil Corp. as the largest constituent of the S&P 500—a changing of the guard from value to growth equities.

Much to the delight of U.S.-heavy passive investors, the next decade of large-cap equity returns was dominated by the narrow leadership of U.S. tech and communications names, characterized as the FAANGs or later iterations.

Demonstrating this, the MSCI World booked 8.1% annualized returns over the 10 years to Oct. 31, versus 3.6% for the MSCI World ex USA index, according to MSCI data, representing a 76-percentage point cost for leaving U.S. equity on the table over the past decade. 

U.S. Equities 

Speaking on the difficulty of forgoing the U.S. equity opportunity, Richard Champion, deputy chief investment officer, UK at Canaccord Genuity Wealth Management, told ETF Stream the U.S. appeals not just because of growth-heavy large caps but the structural qualities of the market.

“The U.S. remains the best market in the world,” Champion said. “They have companies that are more profitable, they have a better legal and capitalistic framework in which to operate so they deserve a premium.”

However, over-concentration in U.S. equity remains a hot topic, with the in-vogue “Magnificent Seven” mega caps comprising 100% of the gains made by the S&P 500 in the first half of this year.

Underlining the dominance of this narrow group, these companies claim the top seven allocations and 18.9% of the total weighting of the parent MSCI World benchmark, an index covering 1,511 stocks. 

The top 10 positions of the ex-U.S. benchmark, meanwhile, contain nine European equities and Toyota Motor Corp., with a combined weighting of 13.6%.

These dynamics go some way to explaining why investors such as Champion are looking beyond market cap-weighted exposure to U.S. equities. 

“In the U.S., we have been looking at the equal-weighted ETF as a way of getting a bit more breadth without taking too much specific risk,” Champion added.

Concentration among U.S. large caps also highlights the appeal of segmenting U.S. exposure from the rest of a global equity portfolio from a portfolio construction perspective, much as emerging-market investors might look to root out Chinese equity dominance within the parent MSCI Emerging Markets Index. 

Saurabh Katiyar, executive director, head of index solutions research, EMEA at MSCI, said at a recent ETF Stream roundtable: “We have been discussing EM ex-China but is worth noting this is not just from a risk perspective, it is also about portfolio construction, and we see a similar thing with clients wanting to separate their U.S. equity exposure with the MSCI World ex USA index.”