Global tracker = closet US tracker?

[MuddyBoots]

I've been looking into global index trackers as a simple and low maintenance way to invest long term. If one country or region goes into decline relative to the others, its shares will automatically be replaced by the up-and-coming ones.

I have some in Fidelity's Index World Fund, which tracks the MSCI index. However, looking at the geographical spread of assets, the data shows 69% in the US. Sounds a lot, so I checked GDP figures for comparison and the US at $27 tn is about 26% of world GDP $105 TN.
Asia on the other hand has 37% of world GDP or $38 TN.

Next I tried some comparing other funds:

FUND...............................US % *........Asia %......INDEX.
Fidelity index world........69................1..............MSCI world.
HSBC FTSE all world......59..............16.............FTSE all world.
L&G global 100...............74................3.............S&P global 100.
Vanguard FTSE global....59.............17..............FTSE global all cap.

* Some have USA, others are North America.

So my question is, why is the US over-represented by at least 2x in the global trackers, and Asia under-represented? Does this mean the diversity and risk profile aren't what I expected? Or maybe I'm not comparing the right figures by looking at GDP.

Two possible reasons I can think of are that the indexes focus on developed economies so some big emerging economies are excluded, like Russia, China and India. Also that perhaps some countries are more closed to outside investors (China?).

[mc2fool]

So my question is, why is the US over-represented by at least 2x in the global trackers, and Asia under-represented? Does this mean the diversity and risk profile aren't what I expected? Or maybe I'm not comparing the right figures by looking at GDP.

Two possible reasons I can think of are that the indexes focus on developed economies so some big emerging economies are excluded, like Russia, China and India. Also that perhaps some countries are more closed to outside investors (China?).

Well, there are difference in what the various "global" indices include, but much more to the point is that there's no necessary relationship between stock market capitalisations (which is what the indices reflect, and the trackers follow) and GDP.

To take a closer to home comparison, GDP wise Germany is bigger than the UK but its stock market is half the size (value-wise). Part of that is because German companies tend to prefer raising money by debt more than by public offering, as UK companies prefer. So, there's a difference in business socio-economic culture, and I'm sure you can think of even bigger such cultural differences between, say, the US and China.

So, yes, looking at GDP isn't particularly helpful...

[gryffron]

And the Chinese stock market is a minefield. Full of cowboys and outright crooks. And even the bigger and more legit companies can have poor governance and reporting. As a result of which most funds and trackers ignore China. Or at most, hold only a tiny fraction of its stock market’s value. A handful of the biggest companies.

Other countries can be even worse. Russia, South America…

The trackers tend to steer well clear of such dodgy markets. So they don’t even reflect the reported size of global stock markets, let alone GDP.

OTOH even the s&p500 now gets well over half its earnings from outside the US (71% at last report). So you could always look at it that the US stock market is itself just a tracker of the global economy.

Gryff

[xxd09]

Investments and investors like well regulated safe markets
US leads here in size and good regulatory procedures followed by rest of developed world
Global funds are based on quality and those countries with poor financial regulations suffer accordingly
xxd09

[MuddyBoots]

Thanks all ! So it looks like a regular western based tracker for most of the portfolio is best, with a small amount in a developing markets / BRICS fund if I'm brave enough.

Some other threads about the US economy did make me sit up and pay attention, especially the debt levels which might weigh down their growth potential? But of course other countries have their problems too.

Another thought was whether there's any duplication of larger global companies being listed in more than one country, that could lead to a distortion of the trackers ' geographical spread. Are companies allowed to list in more than one country?

[xxd09]

Betting against the US has been a failing policy for many years -will this continue?-probably
Global index tracker can have variations-probably best to just choose one from a reputable source ie Vanguard and then just hold forever
Amount you save and length of time you hold much more important to your portfolio success
Watch costs also
xxd09

[JohnW]

‘Are companies allowed to list in more than one country?’

In the sense that you are asking, the question does not arise.
A tracker fund is an attempt to invest in the whole market, be it national, global or whatever, in the most efficient way, ie to get the highest return for the amount of risk you are taking. You can be a bit selective if you wish, but you increase your risk which can result in higher or lower returns than the market return. That’s the ‘efficient market hypothesis’: unless you know something about the securities’ prices that everyone else (of significance) in the market doesn’t know, your best bet is the market portfolio. It follows that if Shell or Microsoft list in UK and USA and everywhere else it doesn’t matter in the slightest, because the wisdom of the whole market has decided that the value placed on Shell etc is what Shell is worth.

[mc2fool]

Thanks all ! So it looks like a regular western based tracker for most of the portfolio is best, with a small amount in a developing markets / BRICS fund if I'm brave enough.

Well if you buy an all world tracker, like the Vanguard FTSE All-World ETF (VWRL/VWRP), that's what you get. 63.1% North America, 15.9% Europe, 10.8% Pacific (most of which is Japan & Australia, which I assume you'd count as "western") and 10% Emerging Markets.

I'm not sure the comments about trackers avoiding/ignoring "dodgy" markets are correct. Trackers track indices and, while they of course select which ones to track, so offering investors the choice of, say, all world or just developed world, I don't think they ignore countries/markets in an index, otherwise they wouldn't be tracking it ("partial" replication trackers may, of course, ignore smaller constituents).

And indices work by rules, which may include the level of regulation in a market, but you only have to look at the countries covered by all world indices to see that the likes of China, Chile, Columbia, Egypt etc etc are all included.

If you're up for a bit of a read (49 pages) these are the ground rules for the FTSE Global Equity Index Series, which includes the FTSE Global, All World and World series, and covers 48 countries divided into developed, advanced emerging and secondary emerging. (Interesting to see that Iceland is classed, along with the aforementioned, as secondary emerging....)

Another thought was whether there's any duplication of larger global companies being listed in more than one country, that could lead to a distortion of the trackers ' geographical spread. Are companies allowed to list in more than one country?

Companies certainly can list in more than one country, and some do. However, I expect that indices have rules to prevent double counting. See the link above and let us know what you find.

[GeoffF100]

If a market is dodgy that should be reflected in the price of the shares quoted on that market. If you decide to avoid that market, you are, in effect, saying that the market has underestimated the dodginess of that market. What makes you think that you know more than the market?

[Adamski]

I can see been answered, but ... Fidelity Index World and L&G Global 100 are invested in Developed, not Emerging Markets.

VWRL is an All World tracker fund so includes everthing including Emerging.

China is classed as an Emerging market, even though it is the world's 2nd largest economy.

Another factor in the US weighing is the US market has a high PE ratio because of the Tech funds + Telsa. Arguably valuations are too high, but doesn't seem to stop investors piling into them.

[mc2fool]

I can see been answered, but ... Fidelity Index World and L&G Global 100 are invested in Developed, not Emerging Markets.

VWRL is an All World tracker fund so includes everthing including Emerging.

Yes, and in addition to that different index providers can include different countries into what on the surface appears to be the same coverage indices.

"For example, South Korea is classified as an emerging nation by MSCI but has been promoted to developed market status by FTSE. Therefore South Korea is included in FTSE’s developed market index but not its emerging market one, and vice versa for MSCI. Meanwhile, Poland was upgraded to developed status by FTSE in 2018, whereas MSCI still remains unpersuaded – leaving Poland in its emerging market league for now.

Another difference can be seen in the way the Chinese shares are handled..."
https://www.justetf.com/uk/news/etf/msci-vs-ftse-which-etf-provider-is-the-best-index-provider.html

And then there's how small-caps are treated ....

[tjh290633]

How does this stack up against the capitalisation of the various markets? Do world indices reflect these, or is the share of each market arbitrary?

TJH

[Lootman]

Trackers track indices and, while they of course select which ones to track, so offering investors the choice of, say, all world or just developed world, I don't think they ignore countries/markets in an index, otherwise they wouldn't be tracking it ("partial" replication trackers may, of course, ignore smaller constituents).

Indexes have rules that can cause some shares to be omitted from them on the grounds of factors like a lack of liquidity, concentrated ownership structure, no earnings and so on.

So for example Uber is not in the S&P 500 even though at $50 billion market cap, it is easily big enough to be. Companies like Amazon, Tesla and Berkshire Hathaway all took a long time to be included. Sometimes a stock split will trigger the inclusion of a share in an index.

[GeoffF100]

How does this stack up against the capitalisation of the various markets? Do world indices reflect these, or is the share of each market arbitrary?

Yes, if it is a market capitalisation index, the weights are the capitalisations of the various markets. In China, publicly quoted companies are a much smaller proportion of the economy than they are in the US.

[GeoffF100]

Trackers track indices and, while they of course select which ones to track, so offering investors the choice of, say, all world or just developed world, I don't think they ignore countries/markets in an index, otherwise they wouldn't be tracking it ("partial" replication trackers may, of course, ignore smaller constituents).

Indexes have rules that can cause some shares to be omitted from them on the grounds of factors like a lack of liquidity, concentrated ownership structure, no earnings and so on.

So for example Uber is not in the S&P 500 even though at $50 billion market cap, it is easily big enough to be. Companies like Amazon, Tesla and Berkshire Hathaway all took a long time to be included. Sometimes a stock split will trigger the inclusion of a share in an index.

That is a peculiarity of the S&P 500. Other indexes have more liberal rules for inclusion.