MSCI World Under Pressure: Is the Criticism Justified?

Last Updated: 23. November 2023By

In recent weeks, a favorite of private investors has been making headlines again and again: the MSCI World. It is seen as a simple basic investment for ETF savers and promises a low risk of loss due to its broad diversification. The index covers a total of around 1,500 companies from 23 countries. Those who invest here spread their capital among all these companies, usually at relatively low fees. But recently the MSCI World has come under increasing criticism.

Short-term losses – but the long-term average is right The trigger was several months of losses in the ETF, which is usually seen as quite crisis-proof, with a long-term average return of around 9 percent per year. Above all, two factors make critics frown: the focus on sectors and the regional focus of the MSCI World.

Contrary to what the name suggests, the “world” is not represented at all, but only the world of wealthy industrialized nations – and even distorted, since about 70 percent of the total weight is made up of companies from the USA. More than a fifth of the index consists of companies from the tech sector.

Inequal weighting unsettles investors The weighting also unsettles some investors: the top ten of the more than 1,500 included companies already account for 20 percent of the entire ETF. Apple and Microsoft alone together make up around 10 percent of the MSCI World. So is the risk minimization through broad diversification not as far along as some lay investors hope?

At least weakness phases in the mentioned heavyweights could significantly reduce the overall return – the risk of any index fund. But there are alternatives: Several other ETFs come much closer to the claim of “worldwide” than the MSCI World, as they also include companies from emerging markets. This can act as an additional risk or as a profit maker, depending on how it is currently going for the emerging markets. The diversification as a whole is however broader, the overweight of the top ten values at the same time (somewhat) smaller.

Alternative ETFs: similarly structured, more widely diversified But even if significantly more companies, sectors and countries are represented, the top values and main regions hardly differ in the global indices. IT, finance and healthcare stocks are always high on the list, and US stocks practically always make up more than half of the total index weight. Japan and Great Britain also usually count among the heavier investment regions before it differentiates itself more.

So if someone is looking for even broader diversification than in the MSCI World, they can certainly find it. But those who want to focus on regional or industry-specific niches can also find corresponding specialized ETFs. Finally, however, it should be noted that the MSCI World -for years the most popular ETF for private investors and stock market newcomers who do not want to deal with market events on a daily basis- is not a bad investment despite all the criticism recently voiced.

On the contrary: those who have a long breath and invest for decades for their old age will usually be rewarded for their loyalty at the end. However, adding one or two additional titles to your own portfolio and thus ensuring a certain further diversification cannot hurt.