VT - ACWI: Lowered U.S. Exposure Finally A Plus

2023-10-11 16:06:56 ET

Summary

• Global equities are still in a bear market, far from previous highs.
• The iShares MSCI ACWI ETF is a good option for diversifying portfolios globally.
• The ACWI ETF has performed well due to the strong performance of U.S. stocks, particularly in the technology sector.

The market is not the S&P 500 (SP500). The market is technically all assets. Which means that if you're going to argue we are in a "new bull market" for the stock market, you have to look at the world, not just the U.S. To that end, any technician looking at a chart of global equities would likely argue we are still in a bear market. We are not near prior NOMINAL highs, and certainly very far away from after-inflation highs since 2021.

I think U.S. markets are very vulnerable here, which means if you want to spread out your risk, perhaps it's best to go into global equities and not fall pray to home bias. The iShares MSCI ACWI ETF ( ACWI ) is a good fund and proxy for those looking to diversify their portfolio across various geographical regions and market capitalizations. This exchange-traded fund offers broad exposure to equity markets, both in developed and emerging countries, making it an appealing investment choice for those seeking international diversification and long-term growth.

Overview of the iShares MSCI ACWI ETF

The underlying index that ACWI tracks is the MSCI ACWI Index, which includes stocks from both developed and emerging markets. ACWI focuses on large and mid-cap companies, ignoring small-cap stocks, resulting in a portfolio of about 2,351 holdings. While this is a global equity fund, it's still extremely top heavy, with the U.S. making up over 62% of the fund, followed by Japan at a distant 2nd in terms of weighting. I view this as a positive. At least by owning ACWI over the S&P 500 ( SPY ), you're still gaining exposure to stocks but have comparatively lower exposure to an extended U.S. market.

ACWI's Performance

Looking at the historical performance of ACWI, one can see that the ETF has delivered substantial returns since its inception. Much of this, however, is because the U.S. has been such an outlier on the global equity stage in terms of overall performance. China, the UK, Japan, and pretty much everything except India have done abysmally for nearly a decade.

Why? Because Technology has been the clear sector winner, and that's where US momentum has primarily come from. Over 20% of ACWI is in the Tech sector, which is less than the S&P 500 and certainly the NASDAQ.

Comparing ACWI with Other ETFs

When comparing ACWI with other similar ETFs, one notable competitor is the Vanguard Total World Stock Index Fund ETF Shares ( VT ). VT, like ACWI, seeks to provide broad exposure to the global stock market by including small-cap, mid-cap, and large-cap companies. However, VT has a significantly lower expense ratio of 0.07% compared to ACWI's 0.32%. Moreover, VT's underlying index, the FTSE Global All Cap Index, is composed of over 9,400 stocks, providing a wider range of exposure compared to ACWI's holdings.

Potential Risks

While investing in global ETFs like ACWI offers significant benefits such as diversification and exposure to various sectors and regions, it still has its share of underappreciated risks. Investing in ACWI exposes investors to currency risk given the global nature of the fund. As the ETF holds assets denominated in various currencies, fluctuations in currency exchange rates could impact the fund's returns.

Still - I think if one wants to remain invested in equities, de-emphasizing U.S. markets and diversifying globally (which has not meaningfully worked for a long time) may make sense here. Just keep in mind that ACWI could outperform a pure U.S. allocation by simply being down less as profits get taken off the table in tech stocks that have dominated momentum, particularly this year,

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