On a rainy Friday morning in Munich, financial advisor Thomas Weber explains the benefits of an ETF savings plan on the MSCI World Index to a young couple. His words sound convincing: "With a single investment, you gain access to over 1,400 companies from 23 developed countries worldwide." What he doesn't mention is that almost three quarters of this supposedly global investment flows into US equities.
This scene is repeated daily in counselling sessions across Europe. The MSCI World has become the gold standard for passive investors - especially for those investing in equities for the first time. But behind the facade of "global" investing lie realities that many investors do not fully grasp, and it is time to critically scrutinise them.
A bet on America under the guise of diversification
The figures speak for themselves: US equities currently account for around 73.6% of the MSCI World. This dominance has increased dramatically over time - in 2011, the US weighting was still around 50%. A look at the ten largest positions in the index reveals an even clearer picture: all of the top ten positions are held by US companies, led by the technology giants Apple, Microsoft, Alphabet and Amazon.
"You could compare the MSCI World to a yoghurt that prominently advertises berries on the packaging, while in reality they only make up a fraction of the product," explains Dr Klaus Müller, financial analyst at a major German bank. "Many investors don't realise that they are in fact making a massive bet on America with an MSCI World ETF."
This development is no coincidence. The index tracks market capitalisation, and US technology companies have experienced unprecedented increases in value in recent years. A revealing comparison: the performance of the MSCI World and the all-American S&P 500 has been remarkably consistent over long periods of time - a clear indication of US dependency.
The anatomy of a "world index"
The MSCI World was launched in 1969 and has since become one of the most important benchmarks for international equity investments. With 1,396 companies from 23 developed markets, it covers around 85% of the market capitalisation of these countries.
A closer look at the country distribution shows the imbalance: after the USA with 73.57%, Japan follows with just 5.26% and the UK with a meagre 3.49%. Germany, the world's fourth largest economy, has a modest 2.19%.
There is also a clear concentration in the sectors: information technology leads with 24.90%, followed by the financial sector with 16.50% and cyclical consumer goods with 11.27%. Although this concentration reflects the technological change of recent decades, it leads to a sectoral imbalance that entails additional risks.
An impressive success story - so far
Despite all the criticism, the MSCI World's performance to date has been impressive. Since 1978, the index has achieved an average annual return of 10.4%. An investment of €10,000 in 1978 would have grown to over €900,000 today - a convincing argument for long-term investors.
The index has also been convincing in recent times. After a slump of around 40.33% at the height of the financial crisis in 2008, the index recovered quickly. In 2019, it recorded an impressive increase of 28.40%, in 2023 an increase in value of 24.42%, and the positive trend continued in 2024 with an increase of around 19.19%.
These figures explain why the MSCI World has become the entry-level instrument for an entire generation of investors - especially in countries such as Germany, where the equity culture is traditionally weak. "The simplicity of the concept - 'buy the world and hold it for the long term' - is attractive to many investors," explains Michael Hartmann, an independent financial advisor from Berlin.
The dangerous blind spots of a "world index"
But the name "World" is misleading, as critics are increasingly criticising. The index only includes 23 developed countries and excludes important emerging markets such as China, India and Brazil - economies that together account for more than 40% of global GDP and are among the fastest growing markets in the world.
"It's like claiming to have won the World Cup, but only teams from Europe and North America took part," says Claudia Bergmann, an independent financial expert from Berlin. "A truly global index would also have to take into account the emerging markets that will shape the global economy of tomorrow."
Another point of criticism is that the index focuses on large and medium-sized companies. The threshold for inclusion is a market capitalisation of at least 1.7 billion Swiss francs. Smaller, potentially faster-growing companies are excluded. "These 'small caps' in particular often harbour the innovation and growth drivers of tomorrow," explains Bergmann.
For European investors, there is an additional risk: fluctuations in the dollar/euro exchange rate can have a significant impact on performance. In 2022/2023, the dollar weakened significantly against the euro, which slowed down US equities in the portfolios of euro investors. "Many investors underestimate the currency risk associated with such a strong US focus," warns Dr Schulz, an economist at the University of Frankfurt.
Time to question US dominance
While supporters argue that the US dominance in the MSCI World merely reflects economic reality, more and more voices are criticising this concentration.
"The US economy accounts for around 25% of global GDP, but controls almost 75% of the MSCI World - this discrepancy can no longer be justified," argues Prof Dr Heinz Schmidt, financial economist at the University of Hamburg. "What we see here is not the actual economic importance of the countries, but a distortion due to market capitalisation and valuation differences."
The high valuation of American shares, particularly in the technology sector, has led to a historically unique concentration. "The Magnificent Seven - Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla - now make up a disproportionate share of the index," explains Schmidt. "This extreme concentration increases the risk for investors who thought they were broadly diversified."
The long-term sustainability of US dominance is also increasingly being questioned. "The US is facing enormous structural challenges - from high national debt and growing social inequality to geopolitical tensions," warns Dr Julia Meyer, an economist at a major European bank. "It would be negligent to view future economic development solely through US eyes."
Convincing alternatives for the critical investor
For investors seeking a broader and more balanced global diversification, there are now more alternatives than ever. The MSCI All Country World Index (ACWI) also includes emerging markets, providing a more complete picture of global equity markets. With a US weighting of around 63%, it still has a strong American bias, but is significantly more balanced than the MSCI World.
The FTSE All-World Equal Weight Index goes one step further by giving each country the same weighting, regardless of its market capitalisation. "This approach drastically reduces US dominance and ensures genuine geographical diversification," explains financial advisor Sabine Müller from Frankfurt.
Another option is the strategic combination of different indices. "A portfolio of 50% MSCI World, 30% MSCI Emerging Markets and 20% MSCI Europe offers a much more balanced global coverage," Müller recommends. "This combination reduces the US weighting to around 40% while increasing exposure to emerging markets and Europe."
For investors looking for a diversified sector allocation, equal-weight ETFs, which give each sector the same weighting regardless of its market capitalisation, are a good option. "This prevents excessive concentration on individual sectors such as technology and ensures a more balanced distribution," explains Müller.
An increasingly popular alternative are factor-based ETFs that track certain investment strategies such as value, quality or minimum volatility. "These factors have proven successful historically and can compensate for the one-sided orientation of the MSCI World," says Müller.
Actively manage currency risks
European investors should also not underestimate the currency component. "When you invest in the MSCI World, you automatically take on a considerable dollar risk," warns financial advisor Hartmann. "In times of a weak dollar, this can have a significant negative impact on performance."
There are various ways to manage this risk. Currency-hedged ETF variants (so-called "hedged" ETFs) eliminate the currency risk, albeit often at higher costs. Another strategy is to add euro-denominated bonds or equities in order to reduce the currency exposure.
"Globally diversified bond ETFs denominated in local currencies are also particularly interesting," explains Hartmann. "These not only offer diversification on the bond side, but also counterbalance the dollar exposure in the equity portfolio."
The sustainability factor: ESG as an opportunity for reorientation
The growing importance of sustainable investments offers a further opportunity to improve diversification. "ESG indices such as the MSCI World SRI or the MSCI World ESG Leaders tend to have a different geographical and sectoral composition than the traditional MSCI World," explains Dr Laura Schmidt, an expert in sustainable investments.
European companies in particular often perform better on ESG criteria than their American counterparts, which leads to a higher weighting of Europe in these indices. "The MSCI World SRI, for example, has a US weighting of around 65% instead of 74% in the classic index," says Schmidt. "This automatically leads to a more balanced geographical allocation."
There are also differences at sector level: "ESG indices typically have a lower weighting in the oil and gas sector and in certain industrial companies with a high carbon footprint," explains Schmidt. "This can lead to a different risk-return structure, which offers advantages in certain market phases."
The future: tectonic shifts in the global economy
In the long term, the geographical composition of the MSCI World could change dramatically. "We are facing tectonic shifts in the global economic order," predicts Dr Martina Schulz, economist at the University of Frankfurt. "The emerging markets' share of global GDP will continue to rise, while the relative importance of the USA and Europe will decline."
This development could lead to a reassessment of the traditional index categories. "The strict division between 'developed' and 'emerging' markets is increasingly being called into question," explains Schulz. "Countries such as South Korea and Taiwan may soon join the ranks of developed markets, while China can no longer be ignored due to its sheer size."
The rise of new technology centres outside the USA could also change the picture. "Europe is investing heavily in future technologies such as artificial intelligence, quantum computing and green technologies," says Schulz. "Asian countries such as South Korea, Taiwan and, increasingly, India are developing into technology powerhouses. This could weaken US dominance in the technology sector in the long term."
The demographic factor: ageing as a challenge
One aspect that is often overlooked is demographic development. "The USA is facing a much more favourable demographic development than many other developed countries, particularly Japan and Germany," explains Dr Michael Braun, demographics expert. "This could have a long-term impact on economic growth and therefore also on stock market performance."
On the other hand, emerging markets with their young and growing populations offer considerable potential. "India will overtake China as the most populous country in the world and has a young, aspiring middle class," says Braun. "This creates enormous growth potential that is not reflected in the MSCI World."
The risks of concentration
The extreme concentration of the MSCI World also harbours systemic risks. "If a few large companies have a disproportionate influence on the index, this can lead to distortions and the formation of bubbles," warns Prof Schmidt. "The technology bubble of the late 1990s and the current concentration on large technology stocks show similar patterns."
The sectoral concentration is also a cause for concern. "The technology sector is increasingly dominating the index, which increases dependence on a single sector," explains Schmidt. "This contradicts the basic idea of diversification and increases the portfolio risk."
A tool, not a panacea
In the end, despite all the criticism, the MSCI World remains a valuable tool for long-term investors - but it is time to recognise its limitations and explore alternatives.
"The MSCI World is an excellent basic investment, but not a panacea," summarises financial advisor Weber. "In view of the extreme US concentration and the neglect of important growth markets, investors should consider broadening their portfolio."
The good news is that there are now more ways than ever to build a truly globally diversified portfolio. "With a well thought-out combination of different indices, factor-based approaches and sustainable investments, investors can achieve a more balanced global allocation," explains Müller.
For private investors who don't want to delve into the details, multi-asset ETFs can be an interesting alternative. "These offer broad diversification across different asset classes, regions and sectors with a single product," explains Hartmann. "They are often cheaper than actively managed funds and still offer professional diversification."
Conclusion: Time for a new look at global investments
The MSCI World has attracted a whole generation of investors to the stock market and delivered impressive returns. However, its heavy US bias and the neglect of important growth markets are increasingly becoming a problem.
The time seems ripe for a more differentiated view of global investments. The world is changing rapidly and investment strategies must keep pace with this development. Critically scrutinising US dominance and targeted diversification into neglected regions can lead to more robust portfolios in the long term.
"Anyone investing in the MSCI World today should know that they are investing primarily in America - with all the opportunities and risks that this concentration entails," summarises Dr Schulz. "A truly global portfolio requires more than a single index, no matter how prestigious its name may sound."
