ETFs with Equal Weighting: A Closer Look at the MSCI World Equal Weighted Index
A portrayal of the MSCI World Index in its well-distribued state
Dive into the world of two stock ETFs that disrupt the market norm by equally weighing their holdings! For instance, the Xtrackers S&P 500 Equal Weight ETF divides its 500 US stocks at roughly 0.2%, or the Ossiam Stoxx Europe 600 ESG Equal Weight ETF with its 600 stocks in Europe at around 0.167% each.
However, investors craving a parallel equally-weighted ETF for the MSCI World Index are left wanting, as MSCI's MSCI World Equal Weighted Index, boasting 40.8% US stocks compared to the MSCI World Index's 69.5%, remains elusive.
A New Perspective: Sector Weightings
The MSCI World Equal Weighted Index, in contrast, underrepresents tech stocks at only 11.9%, compared to the MSCI World Index's 22.1%. A clear distinction can also be seen in individual stocks like Apple, Microsoft, Amazon, Tesla, and Alphabet A. These tech titans, dominating the MSCI World Index with a combined weight of 13.9%, can only muster 0.33% in the MSCI World Equal Weighted Index, equating to mere 0.066% each.
A Balancing Act
It's crucial to understand the differences between the MSCI World Index and the MSCI World Equal Weighted Index, both tracking the performance of developed market stocks worldwide. Let's break it down:
- The MSCI World Index is composited of large and mid-cap equities from 23 developed countries, covering approximately 85% of the free float-adjusted market capitalization in each country. It follows a market capitalization-weighted sector distribution, meaning sectors with larger market capitalization have a higher representation. Additionally, individual stocks are weighted based on their market capitalization, with larger companies exerting more influence on the index's performance.
- In contrast, the MSCI World Equal Weighted Index incorporates the same constituents as the MSCI World Index but, during rebalancing (typically quarterly), each stock receives an equal weight. This helps reduce the dominance of large-cap stocks and aims for a more balanced sector representation, giving smaller sectors more prominence. Furthermore, in this index, every stock is given equal weight, empowering smaller companies to hold the same index-composition influence as their larger counterparts.
In essence, the MSCI World Equal Weighted Index offers a more diversified portfolio, diminishing the impact of large-cap stocks, while the MSCI World Index focuses on the market's heavyweights reflecting their influence[1].
Here's a comparison table illustrating the differences:
| Feature | MSCI World Index | MSCI World Equal Weighted Index ||---------|--------------------|--------------------------------|| Weighting | Market cap-weighted | Equal-weighted || Sector Distribution | Reflects market cap dynamics | More balanced due to equal weighting || Stock Influence | Larger companies have more influence | Each stock has an equal influence |
Investors who prefer equal weighting in their investment portfolios are yet to find an equally-weighted ETF for the MSCI World Index, as the MSCI World Equal Weighted Index, with a lower tech sector representation of 11.9% compared to the MSCI World Index's 22.1%, remains unavailable.
On the contrary, the MSCI World Equal Weighted Index provides a more balanced sector representation than the MSCI World Index, where equal weight is given to all constituents during rebalancing, thus reducing the dominance of large-cap stocks and empowering smaller companies to hold the same influence as their larger counterparts.
