With the U.S. Equities claiming two-thirds of MSCI Weighting, it begs the question of whether the MSCI World Index is truly global.
The MSCI All Country World Index (ACWI), a widely followed benchmark for global equity markets, has reached unprecedented highs in 2024. The surge is driven primarily by the outsized influence of U.S. stocks, which now make up nearly two-thirds of the index. This marks a significant increase from a decade ago, when U.S. stocks accounted for just half of the global stock market, as reflected in the MSCI All-World Index weightings.
Analyzing the two charts below, there are two key trends in the global stock market. The first is the increasing imbalance within the MSCI All-World Index, driven by the growing dominance of U.S. stocks. In 2014, U.S. equities represented about 50% of the index, but by 2024, their share has surged to nearly 66%. This reflects a significant concentration in U.S. equities, making the global market heavily dependent on the performance of American companies.
Meanwhile, other countries have seen their weightings remain stable or decline. For instance, Japan's share remains at around 7% for both years, and the UK’s weighting has stayed consistent at 4%. Despite its economic scale, China has a relatively modest share, and other developed markets—such as Canada, Germany, Switzerland, and Australia—along with smaller economies like Spain, Sweden, and the Netherlands, maintain weights below 4%. This trend illustrates a notable shift in the global stock market’s balance of power toward the U.S.
The second trend is the strong performance of the iShares MSCI All Country World ETF, a tracker for the MSCI ACWI, in 2024. The ETF started flat at the end of 2023 but gained momentum throughout 2024, rising nearly 30% by December. Although there were some fluctuations, the overall trajectory remained positive, signaling robust investor confidence and a strong risk appetite. U.S. stocks largely influenced this performance, given their dominant weighting in the index.
The skewed composition of the MSCI ACWI has significant implications for global investors:
Ⓐ High Concentration Risk: With U.S. equities accounting for two-thirds of the index, investors in "global" funds are disproportionately exposed to U.S. market trends. Any downturn in the U.S. economy or its financial markets could have outsized impacts on globally diversified portfolios.
Ⓑ Limited Exposure to Emerging Markets: Despite the rapid economic growth in regions like Asia and Africa, these markets remain a minor part of the MSCI ACWI. China, for instance, has a relatively modest weight in the index compared to its economic influence.
Ⓒ Performance Tailwinds: The strong performance of U.S. stocks has been a major driver of the MSCI ACWI's growth. The iShares MSCI All Country World ETF - a tracker for the index, has gained nearly 30% in 2024, with much of this performance linked to the resurgence in investor risk appetite and robust U.S. corporate profits.
As global equity markets evolve, the question of diversification remains crucial. While the U.S. market offers strong returns and liquidity, investors seeking true global exposure might look beyond the MSCI ACWI. This could involve increasing allocations to underrepresented regions or sectors, such as small-cap stocks, emerging markets, or industries poised for growth in non-U.S. economies.
The MSCI All-Country World Index's record highs are a testament to the power and influence of U.S. stocks in shaping global equity markets. While this concentration has fueled impressive performance, it also raises concerns about portfolio vulnerability and missed opportunities in less-represented markets. For investors, the challenge lies in navigating this imbalance while capturing the benefits of a truly global strategy.
Originally published at Substack.
