The MSCI World Index is a well-known and respected international index that tracks approximately 1,540 stocks from 23 developed countries. It covers around 85% of the free float-adjusted market capitalization in each country, making it a comprehensive and representative index for developed markets.
Unlike the MSCI All-Country World Index (ACWI), which includes both developed and emerging markets, the MSCI World only captures stocks from what MSCI terms “developed markets”. This includes the United States, Western Europe, Japan, Canada, and others, while the ACWI also covers developing countries such as China, Brazil, and India. Whether the MSCI World or the ACWI is a better index for your portfolio largely depends on whether you want additional geographic diversification.
There are several ETFs (exchange-traded funds) that track the MSCI World Index available to investors. Here’s everything you need to know about this developed world index fund and the best ETFs for investing in it.
The best MSCI World ETFs
- iShares MSCI World UCITS ETF
- Xtrackers MSCI World UCITS ETF
- HSBC MSCI World UCITS ETF
- Lyxor MSCI World UCITS ETF
- Invesco MSCI World UCITS ETF
- Amundi MSCI World UCITS ETF
iShares MSCI World UCITS ETF (Acc)
The iShares MSCI World UCITS ETF is not only the largest MSCI World ETF, but it is also the oldest and typically has the highest trading volume. This makes the iShares MSCI World UCITS ETF the king of all MSCI World ETFs. The iShares MSCI World UCITS ETF is not the most cost-effective solution; nevertheless, its size, liquidity, and long history provide their own set of advantages.
- Fund size: €40,587m
- TER: 0.20%
- Fund domicile: Ireland
- Replication: Physical
Xtrackers MSCI World UCITS ETF (Acc)
Xtrackers are the ETF arm of Deutsche Asset Management, one of the world’s largest asset managers. The Xtrackers MSCI World UCITS ETF is a physically replicated ETF that tracks the MSCI World Index. It is the second-largest and one of the cheapest MSCI World ETFs available, with a TER (total expense ratio) of just 0.19%.
- Fund size: €8,013m
- TER: 0.19%
- Fund domicile: Ireland
- Replication: Physical
HSBC MSCI World UCITS ETF (Dist)
HSBC is a well-known, global brand and one of the largest banks in the world. The HSBC MSCI World UCITS ETF is a physically replicated ETF that tracks the MSCI World Index. It has a lower TER than some of its competitors at 0.15% and is the most cost-efficient among the alternatives.
- Fund size: €4,395m
- TER: 0.15%
- Fund domicile: Ireland
- Replication: Physical
Lyxor MSCI World (LUX) UCITS ETF (Dist)
Lyxor is a French asset manager with experience in ETFs since 1998. The Lyxor MSCI World UCITS ETF is a synthetically replicated ETF that tracks the MSCI World Index. It has a TER of 0.20% and is domiciled in Luxembourg.
- Fund size: €3,280m
- TER: 0.20%
- Fund domicile: Luxembourg
- Replication: Synthetic
Invesco MSCI World UCITS ETF (Acc)
Invesco is an American asset manager with a strong presence in Europe. The Invesco MSCI World UCITS ETF is a synthetically replicated ETF. It has a TER of 0.19% and is domiciled in Ireland.
- Fund size: €3,349m
- TER: 0.19%
- Fund domicile: Ireland
- Replication: Synthetic
Amundi Index MSCI World UCITS ETF (Dist)
Amundi is a French asset manager and a subsidiary of the Credit Agricole Group. The Amundi MSCI World UCITS ETF is a physically replicated ETF. It has a TER of 0.18% and is domiciled in Luxembourg. It is one of the smaller alternatives in terms of fund size.
- Fund size: €384m
- TER: 0.18%
- Fund domicile: Luxembourg
- Replication: Physical
Why is the MSCI World index so popular?
MSCI World Index ETFs are popular because they are an easy and low-cost way to invest in the global economy. The benefits of global diversification have been well-documented, and the MSCI World index offers a broad and representative sample of stocks from developed markets around the world. By investing in an MSCI World Index ETF, investors are getting a well-rounded portfolio with global diversification without the need to pick individual stocks.
The MSCI captures the performance of over 1,600 companies from 23 countries. Instead of buying shares in these companies individually, an investor can buy a share of the MSCI World Index ETF. This gives them exposure to all of the companies in the index, which is diversified by country, sector, and size.
In terms of geographic distribution, the MSCI World Index is heavily tilted towards the United States. US corporations make up over 60% of the index because American companies are the largest in the developed world. The largest holdings of the MSCI World index are Apple, Microsoft, Amazon, Tesla, Facebook, and Alphabet (Google). As such, the index is influenced by the performance of these mega-cap technology stocks.
The benefits of investing in the MSCI World Index
There are several benefits of investing in an ETF that tracks the MSCI World Index. These funds offer a low-cost and easy way to get diversified global exposure. The index is also broad, representative, and well-established.
- Historical performance: From December 31 1987, until 2021, the MSCI World Index returned an average of 8.48% per year. That isn’t to say that the fund makes money every year, but over long timeframes, this is typically the average return.
- Diversification: Many investors prefer index funds because they offer diversification from day one. From the very first purchase, an investor in an MSCI World Index ETF owns a tiny piece of over 1600 companies from 23 developed countries. That’s a lot of different businesses to own, which reduces the risk of anyone company dragging down the performance of the entire portfolio.
- Low costs: Buying individual stocks can add up in terms of commissions, currency exchange fees, and other charges. ETFs can typically be purchased for free, and the indexes themselves tend to have very low expense ratios (the fee charged by the fund each year). Since passive indexes automatically rebalance to keep up with changes in the underlying market, there are also no active management fees. Furthermore, index investors don’t spend valuable time trying to pick the “right” stocks – they simply buy the entire market and let it do the work for them.
- Lower risk: One of the biggest benefits of index investing is that it tends to be lower risk than stock picking. By owning a basket of thousands of stocks, investors are less likely to experience the wild swings that can come with owning just a few individual stocks. On the other hand, they also won’t benefit as much from a “home run” pick that outperforms the market.
- Easy to manage: Index funds are easy to manage because they don’t require the constant monitoring that individual stocks do. Investors can set and forget their index fund holdings, and rebalancing is typically done automatically by the fund manager. This hands-off approach can free up time for other activities that are more meaningful to the investor.
The MSCI World Index is considered a well-rounded basis for investors who believe the developed world will continue to grow. Those who invested in the index in the past have been rewarded with steady returns over the years. However, the prior performance of the index is not necessarily indicative of future results, which is why it’s important to consider the pitfalls of investing in this index.
The drawbacks of the MSCI World Index
In comparison to other indexes, the MSCI World has a few disadvantages worth considering. The most obvious one is its geographic concentration. The MSCI World Index is heavily reliant on the economy of the United States and other countries MSCI considers part of the developed world. This leaves the index vulnerable to geopolitical risk. Critics have pointed out that the MSCI’s definition of the “developed world” is outdated or too restrictive and that the index is missing out on big economies like China and India.
While the US has been a stable and growing economy for many years, there’s no guarantee that the US economy will continue to outperform the rest of the world indefinitely. That’s why some index investors prefer to own a more global index, like the MSCI All Country World Index (ACWI), which includes both developed and emerging markets.
Conversely, some investors prefer to stick with US-centric indexes because they believe the US economy is more stable and predictable than other countries. If an investor’s goal is to simply capture the returns of the US stock market, then there’s no need to own a global index. The S&P 500 Index is the most popular option for this purpose, and it has historically been a very strong performer.
Second, the MSCI World Index is heavily weighted towards large-cap stocks. This means that the index is less volatile than small-cap indexes, but it also means that it may not provide as much growth potential. In a bull market, small caps tend to outperform large caps – and vice versa in a bear market. However, we should note that the index is passive in the sense that it follows the market and does not try to outperform it.
How to pick an MSCI World ETF
It can be confusing to pick the right MSCI World ETF because there are so many options available. They all seem the same on the surface, but there are some subtle differences that are important to keep in mind. Here are the main factors to look at when picking the best MSCI World ETF.
ETF stands for “Exchange-traded fund,” and the fund is the company that actually owns stocks in the companies listed in the index. When we talk about the size of a fund, we are referring to the total value of the capital held by the fund in the current market. It’s the total amount of money that an ETF has invested in equity, cash, and other securities.
When it comes to ETFs, bigger is better. A larger fund size is a good indicator of an ETF’s popularity, durability, and longevity. It means that more people are investing in the ETF, which keeps the product relevant and liquid. It also gives the fund manager more buying power, which can help to keep costs down, resulting in a lower expense ratio for the investor. Large ETFs imply that the fund has a long track record, which provides some predictability that the fund is fit to survive through different market conditions.
The fund provider is the company that creates and manages the ETF. When you’re picking an MSCI World ETF, you’ll want to choose a fund provider that has a good reputation and track record. There are a few big companies that dominate the ETF market: BlackRock (iShares), Vanguard, and Amundi, to name a few.
These companies have been in business for many years, and they manage trillions of dollars in assets. They had the resources to weather financial storms in the past, and they have a long track record of success. While there are many smaller providers that offer MSCI World ETFs, many believe it’s best to stick with the big names.
The fund domicile is the country where the fund is legally registered. It’s important to note that this is different from the index country. For example, an MSCI World ETF could be domiciled in Ireland even though it tracks stocks from all over the world.
Fund domiciliation is important because it determines the tax treatment of the ETF. Because US equities make up a significant proportion of the MSCI World Index, having an ETF that is domiciled in a country with low dividend withholding taxes on US stocks is important. For example, European ETFs are mostly domiciled in Ireland or Luxembourg because these two countries have favorable tax treaties with the US.
However, some investors may live in countries with even better treaties with the US, so it’s worth looking into whether there are MSCI World ETFs or similar funds domiciled locally.
Dividend distribution – accumulating vs distributing
Most MSCI World ETFs have two share classes: accumulating and distributing. The difference between these two share classes is how the fund handles dividends.
- With an accumulating share class, the fund reinvests dividends back into the ETF. This has the effect of compounding returns, which is beneficial for long-term investors.
- On the other hand, distributing shares pays out dividends to shareholders. This is convenient for investors who want to receive regular income from their investment, but it also means that they miss out on the compounding effect of reinvesting dividends.
Depending on where you live, there may be tax implications to consider when choosing between accumulating and distributing ETFs. In some countries, there is no difference in taxes, while in others, it can make sense to combine both types of ETFs in a portfolio.
Costs – Total expense ratio
The total expense ratio (TER) is the annual fee that an investor pays to own an ETF. This includes the management fees, administrative costs, and other operating expenses. Fortunately, most MSCI World ETFs have a relatively low TER. This is because the index itself is very simple to manage – there’s no need for active management or complex strategies. MSCI World ETFs are passive funds that simply track the index, so they tend to have low expense ratios.
We are seeing expense ratios drop dramatically in recent years as competition increases and technology improves. Most MSCI World Index ETFs have a TER of 0.20% or less. This means that an investor would pay €20 in fees for every €10,000 invested. It’s possible to find ETFs with even lower expense ratios, but it’s worth noting that the TER is not the only cost to consider. Some ETFs have higher bid-ask spreads, which can offset the lower expense ratio.
There are two ways to replicate an index: physical replication and synthetic replication. With physical replication, the ETF fund manager buys all (or a representative sample) of the stocks in the index in order to track its performance. This is the most common method used by MSCI World ETFs.
With synthetic replication, the ETF fund manager does not buy the underlying stocks. Instead, they enter into swap contracts (usually with banks) that give them the return of the index. This method is less common and not necessarily cheaper. It’s also considered more complex and can be riskier.
While synthetic ETFs are often shamed in investing circles, there are some advantages to this method. Synthetic ETFs tend to have a lower tracking error and generally outperform physical ETFs because of the way dividend distribution by non-physical ETFs is treated in tax laws in the US and elsewhere. However, these rules are complex, and it’s important to research how physical vs synthetic ETFs are treated in your jurisdiction.
The tracking difference is a measure of how well an ETF tracks its underlying index. A low tracking difference means that the ETF is closely following the index. For example, if the MSCI World Index goes up by 0.50% in a day, you would expect the ETF to go up by a similar amount. If the tracking difference is high, it means that the ETF is not following the index as closely.
The tracking difference is important because it can impact your returns. If you’re investing in an ETF to get the return of the MSCI World Index, you don’t want a high tracking difference. However, a higher tracking difference doesn’t necessarily mean that the ETF is bad. Some investors are willing to accept a higher tracking difference in exchange for other benefits, such as lower costs or a specific replication method.
MSCI World history
Morgan Stanley Capital International (MSCI) was founded in 1968 as a way to track stocks from various countries outside of the United States. They launched as ‘The Capital International Indexes’ and were later renamed MSCI. The MSCI Developed Market Index started in 1969, while the Emerging Markets Index was launched in 1987.
The MSCI World Index was first published in 1986 as a way to measure the stock performance of all developed countries, while the MSCI All-Country Index (Developed Markets & Emerging Markets) started trading in 1995. The MSCI Indexes have been growing in popularity ever since and continue to provide valuable information on risk and return for various markets. Today, these indexes are very advanced, with daily rebalancing, risk-management tools, environment and ESG data, multiple currency versions, and much more.
MSCI World vs S&P 500
The S&P 500 is a US stock market index that includes the 500 largest publicly-traded companies in the United States. Those companies are also represented in the MSCI World index. However, the S&P 500 has a much higher weighting towards US stocks, while the MSCI World contains a more even distribution of stocks from different countries.
The MSCI World is more diversified than the S&P 500, with a lower weighting towards US stocks. However, this distribution has not translated into better performance in the past, as the S&P 500 has historically outperformed the MSCI World. That said, there is no guarantee that this will continue to be the case in the future.
MSCI World vs FTSE Developed World
The FTSE Developed World Index is another global stock market index that covers a similar investment universe to the MSCI World. The FTSE Developed World Index is currently investable through the Vanguard FTSE Developed Markets ETF, while the MSCI World is available through a number of ETF providers.
The FTSE Developed World tracks the performance of around 2,223 large and mid-cap stocks from 25 developed countries. It includes two more countries than the MSCI World: Poland and South Korea. The index, therefore, holds stock in more companies than the MSCI World, although the top 10 holdings are the same.
MSCI World vs MSCI ACWI
The MSCI World Index is very similar to the MSCI ACWI Index (All Country World Index), but there are a few key differences. The MSCI World only includes what the MSCI considers developed markets, while the MSCI ACWI includes both developed and emerging markets. Furthermore, the MSCI World includes around 1,540 companies, while the ACWI covers around 2,939 companies.
The MSCI World covers 23 developed countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.
In contrast, the MSCI ACWI covers 23 developed (those above) and the following 24 emerging markets: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.
MSCI World vs FTSE All World
The FTSE All-World Index is very similar to the MSCI ACWI, as it covers both developed and emerging markets. Both the FTSE All-World and MSCI ACWI are all-world market indexes that measure the performance of the global economy.
The MSCI World and FTSE All-World are two different indices and not comparable. The MSCI World focuses on developed countries only, whereas the FTSE All-World includes smaller nations such as Greece, Taiwan, and Indonesia that are considered emerging.
The FTSE All-World measures the market performance of large- and mid-capitalization stocks of companies located around the world. It includes approximately 3,900 holdings in nearly 50 countries, including both developed and emerging markets. By investing in the FTSE All-World, you gain exposure to a broad range of companies from China, India, Brazil, and others, that are not included in the MSCI World.
How to invest in the MSCI World Index
It’s surprisingly easy to invest in the MSCI World Index. The best way to do this is through one of the exchange-traded fund (ETF) discussed above. These ETFs can be bought through an online broker.
1. Find the MSCI World ETF you want to buy
We discussed the different MSCI World ETFs available in the section above. We also considered the advantages and disadvantages of this index in comparison to other international indexes. If you choose the MSCI World as your investment destination, you’ll want to thoroughly research each available ETF before making a selection.
- Expense ratio: This is the annual fee charged by the ETF provider, and it’s important to consider because it will eat into your investment returns.
- Tracking error: This measures how closely the ETF tracks the underlying index. A lower tracking error is better.
- Fund size: A larger fund size can indicate that the ETF is more popular with investors and may be more liquid.
- Fund domicile: This is the country where the ETF is based and can affect factors such as taxation. For example, European ETF providers of the MSCI World often domicile their funds in Ireland because of the country’s double tax agreement with the US.
- Accumulating vs distributing: With an accumulating ETF, dividends are reinvested back into the fund. This can be advantageous if you want to compound your investment returns. With a distributing ETF, dividends are paid out to investors.
- Taxes: When investing in an ETF, you need to consider the taxation implications in your country. Some jurisdictions treat dividends distributed from an ETF more favorably than those reinvested, while others have no distinction or may even favor accumulating ETFs. Some countries have a positive double tax treaty with the country where the fund is domiciled, while others don’t. Unfortunately, there are many factors to consider here, and it’s recommended to research in your local language to ensure you understand the implications.
Once you’ve decided which one you want to buy, the next step is to find an online broker that offers it.
2. Open a brokerage account
Although you possibly already have a brokerage account, there may be options out there that are better suited for ETF investing. Many online brokers offer commission-free ETF trades, which can help to keep costs down. Some brokers also offer other advantages, such as recurring, automated investing, which gives a completely hands-off experience.
3. Purchase the index fund
After you’ve decided on an online broker and opened an account, you’ll need to fund it with money. Once that’s done, you can search for the ETF you want and place a buy order.
- Currency: ETFs can be traded in different currencies, which can be confusing at first. For example, the iShares Core MSCI World ETF is traded in USD but also has a EUR and GBP share class. The simple choice is to pick an ETF that is traded in your account’s base currency to avoid FX fees. ETFs’ currency risks are a complicated subject, but if you want to geek out on ETFs, they are definitely worth researching.
- Stock exchange: The largest MSCI World ETFs trade on different exchanges, such as Deutsche Börse, London Stock Exchange, Borsa Italiana, and many others. If your broker only supports trading on certain exchanges, then you’ll need to find an ETF that trades on one of those.
You can find recommendations for the best online brokers for ETF investing here.
Investment costs of MSCI World
Cost control is an important factor to consider when making any investment. When it comes to investing in ETFs, there are a few costs to consider besides the fund’s total expense ratio (TER).
Primarily, you want to look at the fees charged by your broker. Brokerage fees can vary significantly depending on the broker you use, and there’s no need to pay more than you have to. Many online brokers now offer commission-free ETFs, so it’s worth shopping around to find the best deal. You can find a comparison of European online brokerages where you can trade ETFs without paying a commission.
An ETF savings plan is a great way to invest in the MSCI World Index (or any other index) without having to pay brokerage fees. With an ETF savings plan, you can set up a regular investment with the online stock brokerage. The broker will then buy the ETF for you on the stock exchange once per month (or at another interval that you choose). Ideally, this means that you only have to pay the ETF’s TER and not the brokerage fees.
Currency risk and cost
Currency risk is important to consider when investing in any international ETF. There are five factors to consider when thinking about currency in your ETF portfolio:
1. FX fees and the base currency of your investment account
Every investment account has a base currency, which is the currency that your account is denominated in. For example, if you have a EUR investment account, then your base currency is EUR.
When you invest in an ETF that is traded in a different currency, your broker will charge you an FX fee. This is typically between 0.25% to 1% of the invested amount. For example, if you buy the iShares Core MSCI World UCITS ETF (traded in EUR) with a USD investment account, your broker will convert USD to EUR and charge you an FX fee.
A large portion of your potential returns can easily be lost to FX fees, so it’s important to be aware of them. For example, by investing $10,000 in a EUR-denominated ETF, an investor with a USD investment account would have lost $50 to FX fees (0.50% of their investment). This loss would only recuperate if the ETF rose by an additional amount.
2. The trading currency of the ETF
When you invest in an ETF, you must buy the fund on a stock market. ETFs are traded in a variety of currencies on exchanges. For example, UK ETFs are typically sold for GBP, German ETFs for EUR, and so on. The trading currency of the ETF should not affect the currency risk of the ETF and should not have any influence on its performance.
3. The currencies of the underlying assets
The MSCI World tracks stock from companies all around the world. These companies are from countries with different currencies, such as the USD, EUR, JPY, and so on. These equities trade on stock exchanges in their local currency. For example, a German company’s stock might trade on the Frankfurt Stock Exchange in EUR.
This means the fund is exposed to different currency risks, depending on the weighting of each country in the index. In the MSCI World Index, the majority of the stocks are from the United States, which means that the USD is the dominant currency among the underlying stocks.
3. The base currency of the ETF
The fund’s base currency is different from the ETF’s trading currency. The base currency is the currency that the fund’s assets are denominated in. For example, a USD-denominated ETF can have EUR as its base currency. An ETF’s base currency primarily relates to reporting obligations and consolidation in the fund’s accounting records.
4. Whether the ETF is hedged or unhedged
Currency hedging is when the fund manager takes steps to protect the ETF from currency fluctuations. For example, they might use currency forward contracts to hedge against EUR/USD risk. An unhedged ETF is not protected from currency fluctuations. But currency protection doesn’t necessarily translate into better returns for equity ETFs over the long term, as research from Vanguard shows. In addition, many currency-hedged ETFs are more expensive than their unhedged counterparts.
Many of the companies in the index operate internationally, which means their profitability is exposed to currency risk. For example, a US company that generates revenue in EUR will see its profitability change as the USD/EUR changes. The company may not wish to hedge foreign currency because of the cost or because they need the cash liquidity to operate in those markets.
MSCI World Index FAQ
What is the best MSCI World ETF?
The best MSCI World ETF depends on a number of factors: where you live, whether there is a ‘tax wrapper’ account available to you, the fees charged by your broker, and whether you want an accumulating or distributing ETF. Furthermore, the replication method used by the ETF (physical vs synthetic) can also affect performance and taxes, which is something to consider if you are looking for the best possible return.
Does MSCI World include China?
No, the MSCI World Index does not include China. Chinese A-shares are not included in the index due to difficulties with foreign ownership and access. This makes it difficult for the MSCI World to include Chinese large-cap shares in its index in accordance with its investment and weighing guidelines.
MSCI World Index ETFs have become popular among investors because they offer broad exposure to international stocks in a single inexpensive investment. While the MSCI World Index is a well-researched and vetted index, it’s important to understand the key differences between this index and others like the S&P 500 or MSCI ACWI before making any investment decisions.
When deciding on an MSCI World Index ETF, make sure to research which fund best suits your situation. Your country of tax residence may have specific taxation rules and regulations for ETFs depending on where the fund is domiciled, whether it distributes or accumulates dividends, whether it’s hedged to your local currency, and more. The best MSCI World ETF for you will ultimately depend on where you live and your individual goals and circumstances.