Shedding light on an Equally-weighted MSCI World ETF: A refreshing take on traditional portfolios
The depiction of a well-balanced MSCI World Index is provided below.
Stock ETFs with equal weighting in their holdings are a rare sight for investors, but they're out there. For instance, the Xtrackers S&P 500 Equal Weight ETF gives 0.2% weight to each of the 500 stocks from the US leading index, or you could go for the Ossiam Stoxx Europe 600 ESG Equal Weight ETF with a 0.167% allocation for each of its 600 stocks from the Stoxx Europe 600 Index.
However, investors are still searching for an equally-weighted ETF on the MSCI World Index. Even though the MSCI World Equal Weighted Index exists, US stocks only hold 40.8% of the portfolio, significantly less than the 69.5% dominance in the MSCI World Index.
Sector Shifts
The MSCI World Equal Weighted Index also presents a different sector allocation. Rather than weighing tech stocks at 22.1%, as seen in the MSCI World Index, it only assigns 11.9% to the tech sector.
Changingacomposition
The changes in individual stock holdings are the most noticeable differences between the two indices. In the MSCI World Index, the top five holdings are Apple, Microsoft, Amazon, Tesla, and Alphabet A, accounting for a combined weight of 13.9%. In contrast, the MSCI World Equal Weighted Index distributes these five stocks with a mere 0.33% combined weight, as each stock only composes 0.066% of the index.
Caveat Emptor: The author holds direct positions in the following financial instruments mentioned in this publication or related derivatives, which could benefit from potential price movement resulting from the publication: Amazon, Apple.
Now, let's dive a bit deeper into the matter. The MSCI World Equal Weighted Index maintains the same constituent securities as the MSCI World Index, but it differs in its weighting methodology.
Equal selection, unequal distribution
Both indices share the same parent universe comprising large and mid-cap stocks across 23 developed markets. However, the MSCI World Equal Weighted Index equally weights its constituents, in contrast to the MSCI World Index that follows a free-float market cap weighting strategy. As a result, the MSCI World Equal Weighted Index has a more balanced exposure to sectors and countries, unlike the MSCI World Index, which naturally overweights sectors and countries with the largest market caps.
Rebalancing for balance
The equal-weighted version requires more frequent rebalancing to maintain equal allocations, leading to increased turnover compared to the traditional market-cap approach. This methodology emphasizes smaller companies proportionally more than in the market-cap-weighted index. However, specific holdings data for the exact MSCI World Equal Weighted Index isn't available, but the pattern aligns with MSCI's other equal-weighted indices, where the largest holding's weight decreases from 1-5% to the 0.07-0.3% range.
- Despite the lack of a directly equivalent MSCI World ETF with equal weighting, there are ETFs like the Xtrackers S&P 500 Equal Weight ETF and the Ossiam Stoxx Europe 600 ESG Equal Weight ETF that offer equal weighting in their holdings.
- The MSCI World Equal Weighted Index, although it shares constituent securities with the MSCI World Index, utilizes a different weighting methodology, resulting in a more balanced distribution of sectors and countries.
- One striking difference between the two indices is the sector allocation, with the MSCI World Equal Weighted Index assigning a significantly lower weightage (11.9%) to the tech sector compared to the MSCI World Index (22.1%).
- The MSCI World Equal Weighted Index's equal weighting methodology necessitates more frequent rebalancing, leading to increased turnover and proportionally more emphasis on smaller companies compared to the market-cap-weighted MSCI World Index.
