Monthly Archives: July 2014

World Stock Market – What Does It Look Like? (7/17/2014)

Continuing on the theme from my last post, I’ve decided to explore what countries make up the Total World Stock market.

Exhibit 1 shows % of World Market Cap by country from two sources. The first one is an actual real-world product that anyone can invest in – Vanguard Total World Stock Index ETF (VT). It is based on an index managed by FTSE which decides which countries and companies make the cut. The second is a more theoretical calculation from the World Bank. As you can see, VT invests in “only” 46 countries, but they represent 96% of the true total world opportunity.

According to Vanguard’s website, VT provides “Broad exposure across developed and emerging equity markets around the world, including the United States.” This means that it’s not really a TOTAL World fund and it does not include “Frontier Markets” which account for the missing 4% in the World Bank column. FTSE’s country classification methodology assesses markets against size, basic governance and market infrastructure.

It’s really not a huge deal from investor’s perspective to be missing exposure to such countries as Kuwait, Nigeria, Argentina and Qatar. Do note, however, that these markets have performed quite well in the last couple of years, mostly driven by increasing interest and capital flow from foreign investors looking for more growth.

Another reason I show both data sets is to make a point about China. That country has a jumble of various share classes and makes investing by foreigners difficult. So the broad world and international stock index funds misrepresent the true weight of China’s stock market. This issue is quite interesting and complicated – I may do a separate post on it at some point, but consider this an FYI.

Exhibit 1


Exhibit 2 shows VT’s sector breakdown. Financials are by far the largest group, while technology has a much lower weight than the domestic indices.

Exhibit 2



Another interesting data point is a share of World GDP by country (Exhibit 3). I also calculated the over/under representation of each country in the world stock market relative to its GDP. For example, United States account for 49% of the world market cap but “only” 22% of GDP. Thus, its market has 49/22 = 2.2x or 219% the weight that its economy does. The top and bottom five countries on that metric are highlighted in the table. As expected, mature stocks markets of North America and Europe take more than their fair share of the world capitalization (Taiwan and Hong Kong numbers are muddy with China relationship). While the less developed countries with high government ownership of productive assets are under-represented. One interesting observation for me was Germany with only 64%. Most likely this has to do with local market customs – many large family companies chose not to go public and remain unlisted. I bet it had something to do with them winning the World Cup!

Exhibit 3


Exhibit 4 summarizes the same data by region.



I’m not sure if there is any big “moral” or actionable conclusion here, but it’s a good idea to understand what you are buying. You should always take a look under the hood of any fund/ETF you consider investing in instead of just relying on its name.


Indexing – International Edition (7/1/2014)

Back by popular demand, I’m going to continue looking at different areas of ETF market. I have had several requests to review International stock index options and that’s what this post will focus on. Besides, with the World Cup in full swing everybody’s thinking global!

Exhibit 1 summarizes major players and the important data points for the World and International categories. My picks are highlighted in gray. I addressed major decision factors in the prior post, but there are a few others that are particular to foreign stocks:

  • Exposure to Canada and South Korea – depending on the index tracked, some ETFs in the same category will include or exclude these countries so I’m showing % weight for reference
  • Inclusion of Emerging Markets in World ETFs but not in traditional “foreign” stock ETFs, such as EFA
  • Small cap exposure – early competitors tracked mostly large stocks with some midcaps. Newer funds do include small caps and I prefer using those.

Exhibit 1


Review & Picks by Category

World – these ETFs split roughly 50/50 between U.S. and International stocks based on current market value. However, due to home country bias, most U.S. investors typically have only about 30% in foreign stocks so you need to be aware of this difference in composition. Note that these funds allocate about 7% to Emerging Market stocks.

Vanguard is a clear winner here with low expense ratio and nice coverage of small and midcap stocks. It also has 5 times as many holdings as the iShares competitor. SPDR is not a good option here with tiny AUM and no trading volume.

World Ex US – this category takes the domestic stocks out but has exposure to both developed and emerging international stocks. VXUS is the best option in this category. It has lowest expenses, highest number of holdings and good exposure to small/mid stocks. Confusingly, VEU is a similar fund from Vanguard but it is missing small caps. It’s a similar story for the two iShares options. IXUS is another strong competitor based on MSCI index.

Developed – this is where the issues with Canada and South Korea come in. FTSE indices count Korea as a developed country while MSCI as an emerging one. Also, both VEA and iShares products exclude Canada. So if you want a fund that does include Canada, you have to use Schwab or SPDR options (both have 7+% weight). Overall, I like IEFA in this category for its number of holdings and broad market cap exposure.

Did you notice anything mindboggling about this lineup? Blackrock’s iShares has two entries here.   There is EFA with 0.34% price tag, 900 holdings and mostly large cap portfolio. And then there is IEFA costing 0.14%, holding 2,400 stocks and broad market cap exposure. Yet, despite all of IEFA advantages it has $2.3 billion in assets versus EFA’s $55.8 billion! There is absolutely no way to explain this other than investor complacency!!!

Emerging – offers exposure to developing countries such as China, Brazil, India and South Africa. For the same reasons as before, I like IEMG here. Also, you’ll get the right Korea exposure by combining it with IEFA (but no Canada).

Once again, comparing two iShares options is surreal. Somehow EEM is able to hold on to $38 billion in assets with a ridiculous expense ratio of 0.67% versus $4.5 billion for IEMG. EEM was the original ETF in this category and it started off charging 0.75%. When Vanguard entered the fray with VWO (originally at 0.25%), iShares lost a lot of assets so it responded by slightly cutting expense ratio and then introducing IEMG ten year later. So the completion does work to some extent, but still-massive EEM assets highlight investor inertia.

Small Cap – you might want to use these funds if you already have investments in large international stocks through existing ETFs (or actively managed funds). Here I like VSS for its broad portfolio, but note that it does include emerging markets unlike the competitors.

Performance Factor

Note that I didn’t use historical performance at all when selecting the funds I like the most. I would suggest you make the decisions based “fundamental” factors of low expenses, number of holding and exposure to the broad market cap spectrum. If you pick based on trailing performance, you might select funds that underperform going forward. For example, in the small cap category VSS 3-year return of 6.1% is way behind SCZ’s 9.9%. But this is entirely due to emerging markets underperformance during the period and as that reverses (and it will at some point!), SCZ will lag. In fact, it’s behind VSS by 3.7% so far this year.