Significant threats of a significant stock market collapse are being unveiled.
Chatty Guide to Diversifying Beyond the MSCI World ETF
Hey there! If you're an ETF investor on the hunt for broad diversification, you might be thinking that the MSCI World is the solution. But hold your horses! A closer look at this popular ETF reveals a hidden risk that many investors overlook: its dependency on the US dollar.
Let's dive into the issue:
U.S. dominance: A structural problem of the MSCI World
Capital market strategist Stefan Riße at ACATIS warns us about the danger of investing too heavily in the US. Surprise, surprise – the MSCI World is chock-full of US stocks, with over 70% of it parked in the US. A sizable chunk of those stocks belongs to US tech companies.
Riße warns against the steep price investors could pay should the U.S. dollar lose value. The purchasing power parity suggests that the greenback's days as a rising star might be numbered, despite short-term arguments supporting its value.
Keep an eye out for this potential downfall:
Diversification: The answer to reducing risk
So, what's a concerned investor to do? Riße suggests getting your assets in order by diversifying beyond the US, avoiding an overweight of 70% or more in the US. Sound dodgy? Fear not! Balancing it out with European and Japanese investments is an easy solution.
The Land of the Rising Sun offers attractive stocks with favorable valuations and low interest rates. Alongside those, Riisse suggests investing in mid- and small-cap stocks, steering clear of tech giants. European quality companies like Nestlé or LVMH are worth considering for their attractive valuations.
Riße's golden rule for successful stock investing boils down to maintaining a good risk-reward ratio. Recent trends have made that a bit tricky in the US, so it's high time to diversify and secure a better balance.
Alternatives to the MSCI World ETF
Here are some diversified options to help you minimize the US dollar risks and achieve a better risk-reward ratio:
1. International ETFs Excluding the US
- iShares Core MSCI EAFE ETF (IEFA): Offers exposure to Europe, Australia, and the Far East, with a low expense ratio of 0.07% and a distribution yield of 2.95%.
- iShares Core MSCI Total International Stock ETF (IXUS): Provides broad international exposure, excluding the U.S., and a similar expense ratio to IEFA.
2. Emerging Markets ETFs
- Fidelity Emerging Markets Multifactor ETF: Offers exposure to high-growth emerging markets, diversifying further away from US dollar dependence.
- SPDR Portfolio Emerging Markets ETF: Another option for investors seeking emerging markets exposure and high growth potential.
3. Currency Hedged ETFs
- Xtrackers MSCI All World ex US Hedged Equity ETF (DBAW): Offers global equity exposure outside the U.S., with currency risks hedged using derivatives.
4. Regional ETFs
- iShares MSCI Spain ETF (EWP) and iShares MSCI Germany ETF (EWG): Focus on specific regions within Europe, offering high returns and portfolio diversification.
Strategy
- Diversify your investments across different regions and types of markets to minimize dependence on any single economy.
- Consider currency-hedged ETFs to mitigate the impact of currency fluctuations on your investments.
- Active management can help you adjust strategies based on market conditions.
By embracing these strategies, you can minimize the impact of US dollar fluctuations and achieve a more balanced risk-reward ratio. Good luck, and happy investing!
In light of the MSCI World's heavy concentration in US stocks, it's prudent for investors to diversify beyond the US, as warned by capital market strategist Stefan Riße, to avoid an overweight of 70% or more in US investments and the risks associated with the US dollar. Some alternatives to the MSCI World ETF include the iShares Core MSCI EAFE ETF (IEFA) which offers low-cost exposure to Europe, Australia, and the Far East, and the Xtrackers MSCI All World ex US Hedged Equity ETF (DBAW) that provides global equity exposure outside the US while hedging currency risks.
With strategic diversification across different regions and types of markets, investors can minimize dependence on any single economy and achieve a more balanced risk-reward ratio, as suggested by experts like Riße. This approach includes considering currency-hedged ETFs to mitigate currency fluctuations and embracing active management to adjust strategies based on market conditions.
