Fine-tuning your global equities portfolio
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The case for splitting USA and World ex-USA exposure
Key takeaways
• Balanced Diversification1 : Combining both USA and World ex-USA portfolios aligns with global GDP distribution, captures diverse earnings streams, and offers geographically balanced exposure.
• Strategic Allocation: Utilizing MSCI USA and MSCI World ex-USA indices provides transparent, liquid, and cost-efficient building blocks for robust portfolio construction.
• Global Growth Potential: While the USA dominates market capitalisation, the rest of the world, representing 68%2 of global GDP, offers substantial growth opportunities.
1. Global macroeconomics: The constant in an evolving investment landscape
Despite the many advancements in portfolio construction — from sector investing and factor tilts to ESG and thematic approaches — one thing remains a constant: global macroeconomic forces continue to play the dominant role in shaping portfolio returns. While new strategies and tools offer more precision and flexibility, they cannot escape the influence of the key markets that drive global growth. To build a resilient and well-diversified1 portfolio in today’s complex financial landscape, a deep understanding of these global drivers is essential.
These forces are often best captured through allocations to key markets, such as the USA and other major economies. Thus, indices such as MSCI USA and MSCI World ex USA remain strong cornerstones for efficient portfolio construction, reflecting the performance of these key economic regions.
2. MSCI USA’s crucial role in global allocation
To understand the potential benefits of allocating between MSCI USA and MSCI World ex-USA, it is important to recognise the unique role of MSCI USA. In this context, examining the drivers behind the performance of the MSCI World index is especially important.
Global Portfolios: A Tale of U.S. Dominance and Diverse Markets
The MSCI World Index is heavily dominated by the USA, which makes up over 71% of its weight, with the rest distributed among developed markets such as Japan, the UK, France, and Canada.3
This underlines how country allocation, especially between the US and non-US (developed or emerging) markets, can be a primary driver of returns in global portfolios.4
The MSCI World ex-USA Index, as the name suggests, excludes the US entirely and has a more balanced distribution among other developed markets. Of note is Europe's share in the index, which accounts for approximately 51%, thus demonstrating Europe's substantial representation in developed markets outside the United States.5
Source: Bloomberg, MSCI, Amundi. Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
Country Allocation: is USA dominance justified?
The United States' impressive economic prowess is vividly reflected in its free float market capitalisation, which stands at a remarkable 62% of the global total.6 This figure significantly outpaces its share of global GDP, which is 32%.6
This disparity underscores the extraordinary success of the US stock market, which is heavily driven by its booming tech sector. Over time, the country has experienced a phenomenal rally, fuelled by innovative companies. This outsized market performance7 relative to GDP highlights the efficiency and dynamism of US capital markets.
However, it is worth noting that the rest of the world, representing 68% of global GDP, also offers substantial growth potential.6 Diversifying1 into these markets could provide investors with exposure to emerging opportunities and the chance to capitalise on future economic expansions in diverse regions, potentially balancing portfolios and tapping into the next wave of global growth stories.
Source: MSCI, Amundi, “Rest of the World” stands for MSCI ACWI IMI (including Large, Mid and Small Caps). Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
Sector Breakdown: Tech Titans vs. Global Balance
When comparing the sector weights of the MSCI USA Index, MSCI World ex USA Index, and MSCI World Index, clear differences emerge in how these indices are diversified across industries.
The MSCI USA Index is heavily dominated by Information technology, while the MSCI World ex USA Index offers a more diversified1 sectoral breakdown, with financials being the largest sector, followed by industrials. Information technology represents only 8.93% of this index, indicating a much smaller influence of tech stocks in non-US developed markets.8
The MSCI World Index, which includes both the USA and ex-USA components, reflects a blend of these weights, and while information technology remains the largest sector, the presence of financials and industrials from non-US markets provides for a more balanced exposure. This sector diversification1 highlights the complementary nature of combining the US and non-US markets in global portfolios, with the MSCI World ex USA Index adding exposure to sectors less represented in the US market.
Source: Bloomberg, MSCI, Amundi. Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
3. Combining USA and World Ex-USA: A strategic toolbox for global investors
Global Equity Performance: the US edge and the power of diversification1
The MSCI USA Index has vastly outperformed9 its non-US counterpart over the long run, reflecting the sustained dominance of the US equity market, driven by its high allocation to high-growth technology companies. But whilst lower than those of the MSCI USA Index, the MSCI World ex USA Index has nonetheless provided strong returns over the long term3, with sectors such as financials and healthcare contributing to a more diversified1 risk profile.
Source: Bloomberg, MSCI, Amundi. Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
MSCI World ex USA Index can thus serve as an important diversification1 building block, adding value to a global portfolio by mitigating overexposure to US markets and providing potential returns from other developed economies.
Valuation and Dividend Yield
In addition to its potential diversification1 benefits, the MSCI World ex USA Index exhibits lower value metrics and a higher dividend yield versus the MSCI USA Index. This makes it attractive for investors looking to diversify their sources of return beyond the capital gains-driven US market, offering the potential for both capital appreciation and a reliable stream of income.
Source: Bloomberg, Amundi. Past performance is not a reliable indicator of future performance. Best consensus estimates as at 05/09/2024.
MSCI USA and World ex-USA: precision tools for global investors
All in all, the MSCI USA and MSCI World ex-USA indices offer investors powerful tools for building and steering their portfolios with precision. They provide a high degree of granularity, allowing investors to fine-tune their exposure based on their forecasts and considerations.
The MSCI USA index captures the remarkable economic strength and outsized market capitalisation of the United States. It reflects its dominance in global markets, particularly in the technology sector. In contrast, the MSCI World ex-USA index presents potentially compelling opportunities, providing diversification1, lower valuation metrics and higher dividend yields, thus presenting attractive entry points for value-oriented and income-seeking investors.
Using this toolbox empowers global investors to create tailored strategies that align with their unique investment goals, risk tolerance, and market outlook, enabling them to navigate global markets with precision and adaptability.
4. Accessing the opportunity
ETFs provide easy and cost-effective access to these key investment building blocks.
The Amundi MSCI USA UCITS ETF offers exposure to the large and mid-cap segments of the US market. With 601 constituents, it covers approximately 85% of the free float-adjusted market capitalization in the US.
The Amundi MSCI World Ex USA UCITS ETF offers exposure to the international equity markets of 22 developed market countries, excluding the United States, allowing for a more precise allocation to global equities.
1. Diversification does not guarantee a profit or protect against a loss.
2. Source: MSCI, Amundi as at 30/08/2024
3. Source: Bloomberg, MSCI, Amundi. Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
4. Past market trends are not a reliable indicator of future ones.
5. Source: Bloomberg, MSCI, Amundi. Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
6. Source: MSCI, Amundi, “Rest of the World” stands for MSCI ACWI IMI (including Large, Mid and Small Caps). Data as at 30/08/2024.
Past performance is not a reliable indicator of future performance.
7. Past performance is not a reliable indicator of future performance.
8. Source: MSCI, Amundi. Data as at 30/08/2024. Past performance is not a reliable indicator of future performance.
9. Past performance is not a guarantee or indication of future results.
Investment involves risks. For more information, please refer to the Risk section below.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Investor Information Document (“KIID”) and prospectus available on our website www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
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VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
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