Morgan Stanley Capital International (MSCI) is a finance company that maintains several indices related to equities, fixed income and real estate. The All Countries World Index (ACWI) is its flagship global equity index. It consists of large- and mid-cap stocks spread out across 23 developed and 24 emerging markets. It is therefore designed to represent the performance of the global stock market.

Thus, this index is interesting for investors, who a) want to invest in stocks and b) seek diversification across the globe.

It is however crucial to know, how the index is constructed, since there are many nuances when it comes to the allocation of such an index. Moreover, many people investing in indices often just look at the name of the index and are not aware what is actually ‘under the hood’ so to speak.

Index Breakdown

In total, there are 2,900 equities that are included in the index. The largest constituent is Apple, with a market cap of $2,236 billion, whereas the smallest included stock has a market cap of $0.79 billion.

• The average is $17.8 billion.
• The median is $4.9 billion.
• The index covers approximately 85% of the investable global equity market.

First, let’s take a look at the geographic allocation of the index:

At first glance it might seem puzzling, why an index, that has the objective to represent the global stock market, has such a high allocation to the US? Why is it not more evenly distributed among the countries?

The reason is, that the total market capitalization of the American stock market dwarfs all other countries.

Here is a chart, which shows the top 10 countries measured by the total size of their stock markets:

Considering this, the MSCI is actually quite precisely representing the global stock market geographically. At least in terms of total market capitalization.

It is debatable whether this is a good approach for designing an index with the goal of global diversification, but this is a question how the framework of such an index is conceptualized.

The important aspect of it is that investors must be aware that the performance of the index is strongly tilted towards what’s happening in the US. Let’s take an imaginary example: If all stocks around the world would rise by 5%, except all American stocks, which would fall by 5%, the index would still be down (by 1.2% if my math is right).

Next, let’s look at the distribution among the sectors:

As can be seen, the Information Technology sector takes the largest share in the allocation, followed by Financials, Health Care and Consumer Discretionary (11.58%). This comes as no surprise and is approximately in line with what you would see when looking at the distribution in the S&P 500.

Let’s further break it down and look at the 10 largest individual constituents and their overall weighting in the index:

It becomes obvious, that except TSMC all top 10 companies are US companies, which are also the leading companies in the S&P 500. However, the top 10 constituents only account for about 15% of the total allocation, which means that the index is arguably much more spread out in comparison to the S&P 500 (in which the top 5 make up about 20% already).

Therefore, I would argue that — despite its strong overlap with the US stock market — it can provide a better gauge about the global stock market environment, as compared to just looking at the S&P 500 as the key index.

Moreover, from an investment perspective, investing in an ETF tracking the MSCI ACWI also should give a slightly better diversification, since it includes 2,900 both large- and mid-sized companies spread across the globe, compared to just 500 large stocks in the US only.

Index Performance

The following chart shows compares the returns of the iShares MSCI ACWI ETF with the SPX ETF that tracks the S&P 500:

The above chart shows how the S&P 500 has largely outperformed the MSCI ACWI index over the last decade. Starting in 2011 there is a significant divergence between the two lines and especially after the Covid shock, the upward movement of the S&P 500 has been much steeper than that of the MSCI ACWI. Thus, while the ACWI tracking ETF has returned 64.4% since March 2008, investors who invested in the SPX throughout the same time frame have seen almost three times more gains (183.1%).

While there is a huge divergence in returns over this long time frame, it is also visible that directionally the up and down movements of both indices are pretty much the same. Hence, while they are highly correlated, the results might still differ a lot over a given period of time.

Given the above analysis about the equity allocation of the ACWI index, it should not be surprising that there is a strong correlation. Furthermore, the reason why the S&P 500 return exceeded the MSCI so substantially, is due to the fact, that the US stock market in general has had a comparatively strong performance — especially in the period following the Covid panic.