MSCI World ETFs Slip Up: Why Germany Still Loves the Controversial Fund
Preferred Financial Vehicle Among Germans
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Millions of Germans have 'em in their portfolios: ETFs modeled after the MSCI World Index. Critics have long warned about the hidden dangers lurking in these funds, especially popular among novice investors. The recent market turmoil stirred up by Trump has brought this risk to the surface. Here's what investors need to know:
What's the deal with the MSCI World Index?
Germany's ETF craze is in full swing. In 2014, approximately 200,000 Germans invested in ETF savings plans, but by 2024, the number skyrocketed to 9.5 million. Most of these are index funds, where the fund manager doesn't actively choose the stocks, but follows indexes like the Dax or the MSCI World. The latter is an index created by MSCI, which reflects the performance of stock markets in developed countries of Europe, Asia, and North America. For years, ETFs that mirror the MSCI World have been the top-sellers at numerous German brokerages.
Why are MSCI World ETFs so sought-after?
Investors new to the stock market or short on time have been recommended MSCI World ETFs for years as they offer higher returns compared to traditional retirement products such as private pension insurance, without requiring much management. The MSCI World is commonly suggested as a one-fund investment option because of its exceptional performance compared to, say, the German Dax for several years, and its diversified nature with its 1500 stocks from over 20 countries. Nonetheless, developing and emerging markets with often volatile stock markets are not included.
What's the risk with the MSCI World?
Though the index's diversification might seem broad, the stocks are unevenly weighted. In reality, US stocks make up a majority of the index, and the technology sector dominates due to their enormous market capitalization. In years where profits on the stock market mainly went to these thriving tech companies, this was an advantage for the MSCI World. However, critics have repeatedly expressed concerns about this concentration risk for the index and corresponding ETFs if the trend were to reverse.
Has this risk materialized now?
For weeks, US stock markets, particularly the tech giants, have seen a downturn while European indices are showing positive growth. Investors with MSCI World ETFs find themselves in the unusual position of witnessing losses in their portfolios while the Dax leaves them behind.
How severe is this current MSCI World slip-up?
The price movement of the MSCI World isn't catastrophic. In one month, the index has recorded a temporary loss of around seven percent. While this isn't a promise of a speedy recovery, it's worth noting that the index is expected to recover in the long run.
Why is the MSCI World confusing some?
Some experts view the recent developments as a harbinger of a long-term shift in the global stock market: The US economy's growth, and consequently the US exchanges, might face challenges due to Trump's erratic trade policies. In contrast, Europe could experience steady growth, especially if Germany increases its investments with hundreds of billions of euros in new debt. Given the US and technology focus of the MSCI World, it may not fare well in this predicted scenario.
Should Investors Hop Out? Guide for High US Exposure Investors
The demise of American dominance on the exchanges isn't a done deal. If Trump's chaos clears quickly and he implements his promised tax cuts, US corporate profits could soon bounce back - and stock prices could follow suit. It's also uncertain whether Germany and Europe can sustainably boost their growth. Those who switch now might be jumping the gun.
But if investors are convinced that the end of US and tech dominance on the exchanges is imminent or want to mitigate the corresponding concentration risk in their retirement plans, they have several options to diversify their portfolio over the long term. Experts have been recommending this strategy for a while. For instance, switching from the MSCI World to a global index or fund that restricts the weight of individual stocks or markets can help avoid concentration risk. Alternatively, existing MSCI World investors can hedge their bets with ETFs that counterbalance the imbalances, such as emerging market ETFs, ETFs that focus on small companies, or ETFs that mirror major indices excluding the American ones.
Source: ntv.de
- ETF
- Stock prices
- Despite the recent market turmoil caused by Trump's policies, MSCI World ETFs, which are popular among Germans, have seen a temporary loss of around seven percent.
- In contrast to the MSCI World ETFs, other European indices are showing positive growth during this market turbulence.
- For those who want to mitigate the corresponding concentration risk in their retirement plans or are convinced that the end of US and tech dominance on the exchanges is imminent, experts recommend diversifying the portfolio by switching to a global index or fund that restricts the weight of individual stocks or markets, or by hedging bets with ETFs that counterbalance the imbalances, such as emerging market ETFs, ETFs that focus on small companies, or ETFs that mirror major indices excluding the American ones.
