The US is the powerhouse economy among developed markets. It continues to grow faster than any of its other major peers.¹ With interest rates cuts from the Federal Reserve, and tax cuts planned by the incoming administration, its economic might appears set to continue.
This is reflected in its dominance of global financial markets. The free float market capitalisation of the US stands at a remarkable 62% of the global total.² It is by far the highest weighting in most global indices, forming over 70% of the MSCI World index.³ Japan has the next highest weighting, and that is just 5.5%. This figure significantly outpaces the US’s share of global GDP, which is just 32%.²
This underscores the extraordinary success of the US stock market, and in particular, the booming tech sector. A handful of megacap technology companies have been at the forefront of the burgeoning artificial intelligence trend, which has delivered strong earnings and share price performance.⁴ This outsized market performance⁴ of the US market relative to its GDP highlights the efficiency and dynamism of US capital markets.
The diversification⁵ problem
At Amundi ETF, we believe this should give investors pause for thought. Investors with a significant weighting in either the MSCI USA, or MSCI World index will have a large and growing weighting in the technology sector. Technology has shown astonishing growth, and is pushing into new areas all the time. For example, car companies are increasingly defined by their technological rather than their mechanical prowess. Technology is also transforming sectors such as healthcare and agriculture.
However, it is just one sector, and concentration on a single sector introduces risks for investors. The MSCI World ex USA Index offers a more diversified⁵ sectoral breakdown, with financials the largest sector, followed by industrials. Information technology represents only 8.93% of this index, indicating a much smaller influence of tech stocks in non-US developed markets.² For this reason, the MSCI USA and MSCI World ex USA indices can be complementary in a portfolio.
Another potential drawback for investors focusing too much on the US is that they may miss growth opportunities elsewhere. After all, the rest of the world represents 68% of global GDP, and with that comes substantial growth opportunities.² The US does not have a monopoly on innovation and there are pockets of growth across the world. Ensuring these markets are represented in a portfolio gives investors the chance to capitalise on future economic expansion across the world.
Performance
Performance is an important factor to consider. The MSCI USA Index has vastly outperformed⁴ its non-US counterpart over the long run, reflecting the sustained dominance of the US equity market. The swing factor has been its large allocation to high-growth technology companies.
However, the MSCI World ex USA Index has nonetheless delivered creditable returns over the long term.³ Perhaps just as importantly, looking forward it can help investors build a more diversified⁵ portfolio, with sectors such as financials and healthcare holding a higher weighting.
In addition to its potential diversification⁵ benefits, companies in the MSCI World ex USA Index have lower valuations in aggregate and a higher dividend yield versus the MSCI USA Index.⁶ This makes it attractive for investors looking to diversify⁵ their sources of return beyond the capital gains-driven US market, offering a greater balance between capital appreciation and a reliable stream of income.
The MSCI USA index captures the remarkable economic strength and outsized market capitalisation of the United States. It reflects its dominance in global markets, particularly in the technology sector. In contrast, the MSCI World ex-USA index presents potentially compelling opportunities, providing diversification,⁵ lower valuation metrics and higher dividend yields, thus presenting attractive entry points for value-oriented and income-seeking investors.
ETFs offer easy, cost-effective access to essential investment building blocks, allowing investors to flexibly combine them to achieve the desired balance of income and growth. This flexibility helps create tailored investment exposure suited to individual needs.
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Past performance is not a guarantee or indication of future results.
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¹ https://www.imf.org/en/Publications/WEO/Issues/2024/10/22/world-economic-outlook-october-2024
² Source: MSCI, Amundi as at 30/08/2024. Past performance is not a reliable indicator of future performance.
³ https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb
⁴ Past performance is not a reliable indicator of future performance.
⁵ Diversification does not guarantee a profit or protect against a loss.
⁶ Source: Bloomberg, Amundi. Past performance is not a reliable indicator of future performance. Best consensus estimates as at 05/09/2024.
