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ETFreplay
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Come watch our Introduction video on homepage: http://www.etfreplay.com/ Career experiences of founders: buyside portfolio manager, investment banking, institutional & high net worth asset management, website construction & professional trading. We have no affiliation with any financial... More
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  • MSCI World Index 0 comments
    May 5, 2010 4:47 PM
    The MSCI Indexes are quite useful as a starting point for ways to think about the global investment landscape.  Moving from a domestic to a world focus expands the individual equity universe to well north of 8,000 securities (vs the typical Russell 1000 focus of domestic managers).   Global exports are increasing on a secular basis as the world increasingly trades goods and services with each other ---- globalization is unstoppable.   
     
    Ironically, I say all of this as our models have been favoring domestic over international ETFs for months now and being short (or avoiding) Europe in particular seems like more than just a short-term trade.
     
    Nevertheless, over the long-run it makes sense that more choices will offer diversification benefits in terms of enhancing return (long and short) and likely reducing risk (though this benefit becomes less as globalization increases).  Without going into a long dissertation on this topic, I will just instead show the current relative valuations of the MSCI World Index ETF (ACWI).   
     
     
     
     
    Note that approximately 2/3 of this index is in the United States and Europe.   It is not AS out of balance as it may seem as countries like those in China have very low profit margins --- so a company like Google might not contribute a lot to GDP – but it does have very high overall profits.   Similarly, Wal-Mart contributes a lot to U.S. GDP but has very low margins – and China supplies Wal-Mart so you can imagine how their profit margins look.    So each country will have GDP changes and profit margin cycles to think about --- its not just about population and level of future GDP.   
     
    Over the long-run though, these percentages will change in favor of countries with strong demographics --- (the above chart should only be viewed as a snapshot in time).  Importantly, it is not going to be a smooth ride as countries like China and India grow to be much higher percentages of the total.  The next chart from the ETF Portfolios page re-creates the MSCI World Index ETF as a sanity check.  We can do this with regional and country funds.   It won’t be perfect because there are some anomalies with indexes regarding 'sampling' and starting vs ending weights etc.…
     
     
     
     
     
    So within the context of a dynamic (changing) and volatile global marketplace, ETFreplay.com is based upon – finding quantifiable, back-testable methods to help the investor think about balancing reward and risk.  In other words,  to participate in global strength and to avoid (short) regions of the world showing global weakness (money flows out).
     
    Finally, I want to show a look at our ETF Screener.    The ‘ETFreplay.com Selected Betas’ grouping has most of these indexes scattered within it.  We don’t think its complete to just look at regions of the world --- we like to view Relative Strength across asset-classes as well, not just equities.   Note here that this is not properly done unless you are tracking total return  --- dividends and distributions can make a significant difference --- even with non Fixed-Income funds  -- you need clean data to properly calculate relative strength -- especially across asset classes. 




    Disclosure: none
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