In December, I published a note on the iShares MSCI World ETF (URTH), a fund that is supposed to provide exposure to global equities. At least, its name implies so. Upon deeper inspection, it appears that the index it tracks was designed to reflect the performance of equities from advanced economies only, while it is also exceedingly overweight in U.S. stocks, and thus holding it makes no sense for those American investors who seek diversification and risk dispersion and already have portfolios overweight in domestic stocks.
Today, I would like to take a look at its alternative: the iShares MSCI ACWI ETF (NASDAQ:ACWI), which tracks the MSCI All Country World Index. Unfortunately, the ETF has precisely the same issues.
Questionable diversification
ACWI is an exchange-traded fund that has an All Country World Index at the crux. A promising name, isn't it? Does that look almost ideal for an investor who does not want to perform a scrupulous and sophisticated macro analysis and stock screening and instead simply allocates a portion of income to a portfolio of stocks from across the world (perhaps, the simplest passive investment strategy possible)? Yes, at first glance, investing in an ETF that is designed to track an index that has exposure to 23 developed and 27 emerging economies and that "covers ~85% of the global investable equity opportunity set" with equities from the upper- and mid-echelon looks like an optimal way to diversify a portfolio. An investor can benefit from a 5.2% global real GDP growth this year that is anticipated by the International Monetary Fund (or a more conservative 4% growth rate that the World Bank considers likely), while also minimizing possible side effects of the asymmetric recovery across the globe, as some economies, like China, India, and Spain, to name a few, are due to delivering a high-single-digit growth, while Japan, for
