Investing in the world

[onthemove]

The onset of brexit and risks to the UK economy have made me think a little more about global diversification. (Admittedly I feel there could possibly be a little stable doors and bolting horses here, but that's not for this post)

So, after a period a decade or so ago where I had a foray into various ETFs for the far east, etc, I've decided once again that I should at least consider investments outside of the UK. And since I don't want the hassles of individual stocks, or the hassles of holding funds as funds, ETFs are my main consideration.

But here's my point for discussion...

Why is it, that ETFs that span multiple countries, generally tend to have a very high weighting towards their top country, with only marginal holdings in many of the others.

I mean, I know the stock answer is going to be "Well, it's because they're weighted by global market cap" or some such.

But really, does that hold water?

Is that what investors really want?

A fund covering numerous countries, but whose fortune is really going to be determined by the success or otherwise of just one or two particular countries in the fund?

Take for example...

The iShares EM Latin America ETF...
https://www.ishares.com/uk/individual/e ... /251856/#/
With Brazil accounting for 59% against Peru at only 3.4%, the fortunes of Brazil are going to have 10x the effect compared to the fortunes of Peru. A 5% drop in Brazil, would be the equivalent of a wipeout of Peru.

The Vanguard "All World"
https://www.vanguardinvestor.co.uk/inve ... _fund_link
The USA accounts for 53% of value, yet of the 42 markets covered around 25% of them account for only 1% of the value of the fund. I mean, truly, what value do those bottom 25%, at 0.1% each, add to the fund? Even if any of them doubled, it still would be less than the ongoing annual charge for the fund! Even if all 10 smallest holding (accounting for 25% of countries covered) all doubled, it would still only add 1% to your return! What is the point?

The iShares EM dividend...
https://www.ishares.com/uk/individual/e ... ts/251766/
Taiwan accounts for over a quarter of the fund at 27%, with Russia second at 16%. Add to brazil in third place at 10% and you are looking at 50% of the fund being just those 3 countries. Against that, what is the point of holding Greece in there at just 1%?

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Now I could understand a small percentage for each holding if it were largely uniform, and giving you a huge diversification. For example 100 countries at roughly 1% holding in each.

And I suppose that is the crux of the issue for me.

I'd like to hold a globally diversified portfolio, and the idea of being able to buy a ready built one in the form of an ETF is appealing. So when I see names like "All World", my ears prick up and I start to take notice.

But then my enthusiasm wanes, when I look at the details and realise they consider the world to be >50% the USA.

The thing is, if I considered the world economy to be primarily the USA, then for the sake of not bothering with fractional holdings that are going to be of no material difference, but almost certainly adding to the ongoing costs of the fund, then I might as well just stick with a purely US tracker.

But that's not what I want.

I'm looking for global diversification, and I don't consider >50% in just the US to be anything of the sort. (Nor >50% Brazil equating to diversification across Latin America, etc)

What is the true reason that funds weight on country / market capitalisation?

I notice you can find individual ETFs in some of the smaller countries, but they do tend to have much higher charges. Is this the reason that broader funds only keep token holdings in these smaller markets / countries? Have a holding that allows you to pretend to be globally diversified, but keep that holding so low as to be insignificant, but at least that way it keeps your reported OCF charges low?

Aside from charges, I don't think I really understand why, as an investor, you would weight your own portfolio to match the relative market capitalisations of the things you are invested in.

I, like I get the impression many on here, seem to weight our holdings mostly uniformly, with our own ideas about the 'ideal' size an individual holding should be. And I don't think many of us put much, if any weight to adjusting our holding based on the market capitalisation of that holding. (e.g. a typical HYP doesn't weight individual holdings according to the relative market cap, etc)

Why are there not more ETFs that for example cover emerging market countries of similar size, so that each country has a similar weighting in the fund? Or a global fund that is perhaps like a global mid-country cap... choosing perhaps 40 or 50 countries somewhere in the middle-to-upper tier with a fairly uniform weighting across them? (e.g. the 20th to 70th largets economies, which I haven't looked, but I suspect there would be less of disparity in weighting between the top and bottom holdings)

I do like the idea of ETFs, but i do feel like we are being short changed somewhat with the various ETFs that are supposed to be providing global or regional diversification.

From what I can see, if you are going for 'diversified' funds (rather than country specific), your fortunes are going to be determined largely by ..

the US (for North America / Global),
Japan (for Global / Far East),
Taiwan (for EM / Far East),
Russia (for EM),
Brazil (for EM / Latin America),
UK (for Europe)
France (for Europe),
Germany (for Europe).

The inclusion of other countries just seem almost to be for marketing purposes only.

What do others think?

(Not looking for a specific answer or advice or anything, just interested in other people's views - and you never know, some of the companies who create ETFs, etc, might even read these boards and take the views into account in future ETF ideas)

[hiriskpaul]

An answer, which I am not entirely happy with and I doubt you will be, goes as follows. The market allocates capital a particular way, by definition, by market cap. What makes you think you can do better?

If you overweight, others must underweight. Someone is going to be wrong with their weighting, but if you cap weight you will get market returns.

If you overweight say Greece, others have to underweight. If a lot of people want to overweight, that is possible. It only requires the parts people want to overweight to rise in price until everyone is happy with their own personal weighting. Something like that happened not very long ago with Japanese shares.

[77ss]

.....
Why is it, that ETFs that span multiple countries, generally tend to have a very high weighting towards their top country, with only marginal holdings in many of the others.....

I think the three ETFs you mention are passive trackers, and therefore almost obliged to weight according to the indices they track - with the consequences that you observe.

I do appreciate the point you make however. There are a few 'equal-weighted' ETFs around, which might be worth looking at.

Emerging markets could perhaps be covered by the Invesco MSCI Emerging Markets Equal Country Weight ETF.

Please understand that apart from its existence, I know nothing about this ETF - as always, DYOR. The only reason I know about it is that I have been idly wondering about putting some cash into EMs and the ITs that I have been looking at do not enthuse me.

[Hariseldon58]

Why not look at it in a slightly different fashion.

The USA is around half the All World fund, the US consists of a large number of states , many of which, individualy are the economic size of a small country. They happen to be grouped together and labelled as one unit. You could consider the USA as getting 50 countries for the price of one !

It would be nonsense to have the same weighting in the USA as say Finland, the market cap weighting in general is as good as any and avoids the problem if everyone invested along the lines of equal weighting you’d soon run out of stocks of the smaller countries ( or companies)