ETF-Strategy | Haobin Tan

The Concept of the World Portfolio

Fri, 07 Mar 2025 00:00:00 +0000

💡 Take Away

The world portfolio is based on various financial theories, such as the Efficient Market Hypothesis and the Capital Asset Pricing Model (CAPM).
For private investors, globally diversified index funds are suitable. These aim to represent the global economy while minimizing risk through broad diversification.
Financial professionals develop different implementations of the world portfolio, such as the ARERO World Fund and Multi-Factor Investing.

Theoretical Background

By combining some of the financial theories, the foundation is created for the rationale behind investing in a world portfolio.

Markets Are Efficient

Efficient Market Hypothesis (EMH): efficient markets reflect all available information in their prices

If we assume that markets are efficient, then a stock has a value of X because it accurately reflects all relevant information.
As a result, it is impossible for an individual investor to consistently outperform the market in the long run.
- This means that market forecasts published by analysts are ultimately irrelevant.

Capital Asset Pricing Model (CAPM)

This model focuses on pricing in financial markets, specifically the relationship between expected return and expected risk.

The higher the risk, the higher the return.
It has proven useful for private investors, which is why it serves as a theoretical foundation for investing in a world portfolio.

Why a World Portfolio?

To minimize risk, there is one key tool: diversification.

The maximum level of diversification is achieved by investing in everything available (which is why the term “world” is used in “world portfolio.”)
While no world index can truly capture everything, it provides broad exposure at low costs.

Diversifying

avoid individual company risk, which is inherent in stock picking (selecting individual stocks)
minimize regional risk, helps eliminate the so-called “home bias”—a psychological tendency where investors prefer to invest in companies from their home country.

With a buy-and-hold strategy, you avoid the gambling-like nature of market timing. Successfully predicting the best times to enter and exit the market is extremely difficult. By holding your investments for the long term, you eliminate the reliance on luck.

How Is the World Portfolio Implemented?

Different people implement the world portfolio concept in different ways.

ARERO World Fund

ARERO: “Aktien – Renten – Rohstoffe” (stocks – bonds – commodities)
The fund allocates 60% to global stocks, 25% to European bonds, and 15% to commodities.

Gerd Kommer's Approach

Combines global investing with multi-factor investing
Aims to integrate multiple return-enhancing factors, such as small-cap stocks and value stocks

DIY World Portfolio with ETFs

An MSCI ACWI-based ETF covers a large portion of the global economy.
A 70/30 portfolio splits investments between a global index and an emerging markets index.

The variety of world portfolio strategies exists because it is impossible to fully replicate the entire global economy. Every version focuses on certain aspects while leaving others out. Therefore, choosing a specific world portfolio variant is more a matter of personal preference rather than a strict theoretical difference.

Reference

Das Konzept Weltportfolio erklärt

World Index Overview

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

Many indices determine inclusion based on market capitalization or stock value.
Global indices, such as the MSCI All Country World Index (MSCI ACWI) or the FTSE All World Index, are weighted by market capitalization.
- The MSCI ACWI, published by Morgan Stanley Capital International, includes approximately 2,900 companies.
- The FTSE All World Index, from the Financial Times Stock Exchange Group (FTSE), consists of about 3,900 companies.
Many global indices have a high proportion of U.S. companies due to the large number of high market capitalization firms in the U.S.
Index providers also offer specialized indices focusing on emerging markets, Europe, and small-cap companies.

What is a World Index?

A world index is an index composed of (stock) assets from around the world.
- If an index provider weights exclusively by market capitalization, the result is a strong focus on North America.
- You can also weight your world portfolio according to economic performance, measured by Gross Domestic Product (GDP).
The selection of the index on which your ETF is based is already a decision for a specific perspective on the global economy, which significantly influences performance.
World indices are typically divided into developed and emerging markets.

Well-Known World Indices in Comparison

Global Indices

Index	Description
MSCI ACWI	The MSCI All Countries World Index tracks over 2,900 stocks from 23 developed and 24 emerging markets. The share of emerging market stocks is around 10%. U.S. companies have the largest weight, making up approximately 60% of the index.
FTSE All-World	The FTSE All-World Index includes around 3,900 stocks from approximately 50 countries, covering large- and mid-cap companies. It weights companies based on market capitalization.

Major Global Indices

Index	Description
MSCI World	The MSCI World Index (Morgan Stanley Capital International World Index) is a key stock market indicator reflecting global economic development. It includes over 1,600 stocks from 23 developed countries.
FTSE Developed World	This index tracks around 2,100 individual stocks. Although it includes more companies than the MSCI World, its performance is similar, as the additional stocks are mostly smaller companies.
MSCI Emerging Markets	The MSCI Emerging Markets Index tracks around 1,200 large- and mid-cap stocks from 24 emerging markets. Stocks are weighted based on free-float market capitalization and currently account for around 13% of the global market capitalization. Combined with the MSCI World, it provides comprehensive global stock market exposure.
FTSE Emerging Markets	The FTSE Emerging Markets Index tracks approximately 1,700 large- and mid-cap stocks from 24 emerging markets. The stocks included represent about 13% of global market capitalization.
Stoxx Europe 600	The Stoxx Europe 600 is a regional European index rather than a global one. Provided by the Swiss index provider Stoxx, it includes 600 companies that represent over 90% of the European market capitalization, covering small-, mid-, and large-cap stocks. A Europe-focused index can help reduce the U.S. dominance in a portfolio.
MSCI World Small Cap	The MSCI World Small Cap Index tracks small-cap companies from developed markets. It can serve as a valuable complement to a global portfolio by adding exposure to smaller firms.

MSCI vs. FTSE

Both Morgan Stanley Capital International (MSCI) and Financial Times Stock Exchange (FTSE) offer comparable indices: The MSCI World is similar to the FTSE Developed World, as are the MSCI Emerging Markets and FTSE Emerging Markets. The same applies to the MSCI ACWI and FTSE All-World.

Product Comparison:

Product	Morgan Stanley Capital International (MSCI)	Financial Times Stock Exchange Group (FTSE)
World Index	MSCI ACWI (approx. 2,900 stocks in 48 countries)	FTSE All-World (approx. 3,900 stocks in ~50 countries)
Regional Index for Companies from Developed Countries	MSCI World (approx. 1,600 stocks in 23 countries)	FTSE Developed World (approx. 2,100 stocks from 26 countries)
Regional Index for Companies from Emerging Markets	MSCI Emerging Markets (approx. 1,300 stocks in 24 countries)	FTSE Emerging Markets (approx. 1,700 stocks from 24 countries)

The biggest difference: weighting of different regions and the decision about which countries are included in which index

For FTSE, South Korea falls under the category of developed countries and is therefore part of the FTSE Developed World Index. MSCI classifies the country as an emerging market, so it appears in the MSCI Emerging Markets index.
What will be particularly interesting in the future is the classification of China. Currently, both providers classify the world’s second-largest economy as an emerging market.

Ultimately, the choice between MSCI and FTSE comes down to personal preference and cost considerations. Regardless of your decision, make sure NOT to mix the two index providers, or important positions may become overweighted or excluded.

For more detailed comparison, check out this video:

Reference

Weltweite Aktienindizes im Überblick

Regional Weighting in the World Portfolio

Fri, 07 Mar 2025 00:00:00 +0000

💡Take Away

The method used to weight countries and companies in an index can lead to differences in performance. Most (global) indices are weighted by market capitalization, meaning they are based on the value of publicly traded companies.
As a result, there may be discrepancies compared to a country’s actual economic output, which is reflected in its Gross Domestic Product (GDP).
MSCI indices like the MSCI World or MSCI ACWI tend to have an overweight allocation to U.S. stocks compared to the U.S. share of global GDP.
To balance out such overweight allocations, regionally focused indices can be used, such as the STOXX Europe 600, which specializes in European companies with small, mid, and large market capitalizations.

Indices Are Usually Weighted by Market Capitalization

Most global indices, such as the MSCI ACWI, track the global economy based on market capitalization. This means they automatically weight companies according to their value on the stock exchange. The formula for market capitalization is:

$$ \text{market capitalization} = \text{\#outstanding shares} \times \text{stock price} $$

For a country’s economy, market capitalization represents the total value of all publicly listed companies.
The weighting of different countries in global indices like the MSCI World is determined by the total market capitalization of the included companies.
Advantage: automatic rebalancing
- Countries and companies are classified primarily based on their market capitalization
  
  E.g., if a country transitions from an emerging market to a developed economy, it can be automatically included in the corresponding index for developed markets (such as the MSCI World in the MSCI index family).
- Other factors also play a role, such as the proportion of freely tradable shares.

Is the USA Overrepresented?

The aforementioned weighting can be seen as problematic because a large portion of the global economy operates outside the stock markets—in privately held companies.

In the USA, nearly 150% of USA’s economy is market capitalized. This is because many multinational corporations, like Facebook, are headquartered in the U.S., earning revenue globally but being listed on U.S. stock exchanges. This means that the value of U.S. companies exceeds the value of the U.S. economy itself.

Market Capitalization to GDP Ratio

The Market Capitalization to GDP Ratio compares the total market value of a country’s publicly traded companies (stock market capitalization) to its Gross Domestic Product (GP)

It is often used to assess whether a country’s stock market is overvalued or undervalued relative to its economy:

Ratio > 100% → The stock market is larger than the country’s economy, indicating that publicly traded companies have a high valuation.
- This is common in countries like the U.S. (around 150%), where many global corporations are listed domestically.
Ratio < 100% → The stock market is smaller than the economy, meaning a significant portion of economic activity comes from private or non-listed companies.
- For example, in Germany (~50%), many large companies (e.g., Bosch, Aldi) are not publicly traded.
Ratio around 75-100% → The stock market and the economy are roughly in balance.

This situation contributes to the high weighting of the U.S. in market-capitalization-based indices.

While the U.S. makes up 55% of the MSCI ACWI, in EU countries, only a little more than half of GDP is market capitalized, meaning the U.S. overweighting comes at the expense of regions like Europe.

Another factor affecting the balance is company size selection based on market capitalization.

The MSCI World index only includes large- and mid-cap companies, covering 85% of a country’s market capitalization.
However, small-cap stocks, which represent 15% of economic activity, are excluded from the index.

Weighting by GDP as an Alternative

Those who find the weighting of world indices (such as MSCI ACWI) problematic can counteract this by orienting towards GDP-based weighting.

Advantage: Minimize the concentration risk that arises from the tendency to overweight the United States, ensuring broader regional diversification
Allow for a more accurate reflection of the global economy
Open up new opportunities for returns through a stronger emphasis on emerging markets, which are underrepresented in terms of market capitalization.
Challenge: the need for rebalancing, as the relative shares of different GDPs change dynamically over time.

Using Regional Indices for Balance

Easy and stress-free ways to counteract imblances and align more with GDP-based weighting

Overweight emerging markets by increasing the proportion of emerging markets in a mixed index portfolio made up of the MSCI World and MSCI Emerging Markets.
Add an index like the STOXX Europe 600, which includes large, mid, and small-cap companies from Europe. ( Europe is much more strongly represented in a GDP-based weighting compared to a market capitalization-based one. )

Strengthening with Small Caps

Including indices that focus on small-cap companies can be a valuable addition, as small (and mid) caps are underweighted in the MSCI World indices.

Example:

MSCI Europe Small Cap index specifically targets small caps from the European region
STOXX Europe 200 Small

Reference

Regionale Gewichtung im Weltportfolio

ETF Portfolios

Fri, 07 Mar 2025 00:00:00 +0000

A portfolio refers to the collection of investments, which can be structured with various weightings and asset classes. Here, we’ll look at well-known ETF portfolios with examples.

70/30 Portfolio

The 70/30 portfolio is a classic among portfolios with global ETFs.

It is a combination of the MSCI World and MSCI Emerging Markets indices, typically allocating 70% to MSCI World and 30% to MSCI Emerging Markets.
offers broad exposure to both developed and emerging markets, providing a balanced approach to global diversification.

Variant 1

HSBC MSCI World ETF (dist) + Xtrackers Emerging Markets ETF (ACC)

Both ETFs are characterized by a fund volume greater than 100 million euros and a low Total Expense Ratio (TER).

Variant 2

Alternatively, you can also use the products from FTSE. With the FTSE Developed World and FTSE Emerging Markets, there are two very similar ETFs. The differences and similarities of world indices are discussed in this article. It is important to note that mixing the two index providers is NOT advisable, because they have different methodologies and weightings, which could lead to imbalances in your portfolio.

Check this article to learn how to build a 70/30 portfolio and what you should consider in detail.

Gerd-Kommer-World Portfolio

Important components of this portfolio include a stable, risk-free part and a risky part for generating returns.
Building the entire portfolio according to Gerd Kommer is quite complex and not recommended for beginners.

if you want to adopt some parts of the Kommer Portfolio, the following ETFs could be used as examples:

For the risk-free part, one of these short-term government bonds could be added:

Check out this detailed article on Gerd Kommer’s world portfolio.

Allwetter-Portfolio

The All-Weather Portfolio, designed by hedge fund manager Ray Dalio, aims to withstand all market storms. It focuses on four asset classes: bonds, stocks, gold, and other commodities. The All-Weather Portfolio can be fully replicated using ETFs.

Example:

Pantoffel Portfolio

The Pantoffel Portfolio, created by the consumer organization Stiftung Warentest and its magazine Finanztest, gets its name from the comfort it provides once set up. It comes in three variations, depending on risk tolerance or need for security. This portfolio is considered beginner-friendly and well-suited for relaxed, long-term investing.

Sustainable 70/30 Portfolio

A sustainable world portfolio represents the global economy while excluding unethical investments

The definition of what is considered unethical varies
Common standards include ESG (Environmental, Social, and Governance) and SRI (Socially Responsible Investing) labels.
The classic world portfolio can be reconstructed based on these criteria.

Example 1

The ESG and SRI labels differ in that SRI applies significantly stricter criteria, completely excluding any stocks from the parent index that do not meet its standards.

Example 2

Just One ETF

This is possible with the MSCI All Countries World Index (ACWI), which combines stocks from both developed and emerging markets.

Variant: iShare

Variant: Vanguard FTSE All-World

Dividends

If you prefer a world portfolio with high distribution yields, you can best achieve this with dividend ETFs. This is purely a matter of personal preference, as the total returns do not differ from a non-dividend-oriented ETF world portfolio.

Suitable options

Following 70/30 world portfolio: SPDR S&P Global Dividend Aristocrats UCITS ETF (70%) and the SPDR S&P Emerging Markets Dividend Aristocrats UCITS ETF (Dist) (30%). Both ETFs use optimized sampling for physical replication, have solid fund volumes, and are available through brokers like DKB.
Vanguard FTSE All-World High Dividend Yield UCITS ETF Acc: tracks the FTSE All-World High Dividend Yield Index and stands out with a low TER (Total Expense Ratio).

Stocks + Commodities + Real Estate

Many investors prefer to complement their stock investments with a small allocation to commodities and/or real estate to complete their world portfolio. This can be easily achieved by adding:

REITs (Real Estate Investment Trusts) for real estate exposure
Commodity ETFs or ETCs for commodities

This diversification helps reduce risk and increase stability in different market conditions.

Recommendation for commodities is the L&G Commodities ETF, which has a good fund volume and reasonable pricing. It synthetically tracks assets in the following sectors:

Energy (22.8%)
Precious Metals (19.1%)
Agriculture (33.1%)
Industrial Metals (19.7%)
Livestock (5.3%)

An alternative option is the iShares Diversified Commodity Swap, which also synthetically replicates commodity assets.

Recommendation for real estate exposure is HSBC NAREIT, which focuses on listed real estate companies in developed countries.

The regular MSCI World already includes real estate companies, so adding this ETF would lead to an overweight position in real estate, making it a preference-based decision.

50/30 Portfolio with More Europe

Due to the tendency for the United States to be overweighted in traditional global index ETFs (like those from MSCI) relative to GDP, as a result of the market capitalization-based weighting, some investors prefer to add more European stocks to their portfolios. A good option for this is an ETF based on the STOXX Europe 600 Index.

Example:

Reference

ETF-Portfolios im Überblick

70/30 Portfolio - The Classic Global Portfolio

Wed, 19 Mar 2025 00:00:00 +0000

💡Take Away

The 70/30 portfolio is a simple way to build a globally diversified investment portfolio.
It invests broadly in stocks, with 70% allocated to developed markets and 30% to emerging markets.
Developed markets are passively tracked using ETFs like the MSCI World, while emerging markets are typically represented by an MSCI Emerging Markets ETF.

👉 How to Proceed

Use ETF search tool to find suitable ETFs that cover developed and emerging markets. Apply filters for costs and fund size.
Preferably choose the same index provider for both developed and emerging markets.
Invest in ETFs with a fund volume of at least €100 million and a minimum track record of 3 years.

What is the 70/30 Portfolio?

The 70/30 portfolio is a type of globally diversified investment portfolio.

It invests broadly in stocks—70% in developed markets and 30% in emerging markets—following a passive investment approach. This means that instead of selecting individual stocks, investors track the overall market, making it a simple investment strategy.
Since the 70/30 portfolio consists entirely of stocks, it represents the riskier part of a broader investment strategy. Depending on your risk profile, adding a lower-risk component might be beneficial. However, the 70/30 ratio within the stock portion remains unchanged.

What Does the 70/30 Portfolio Consist of?

The 70/30 portfolio is built using just two indices:

70% for developed markets (e.g., MSCI World).
30% for emerging markets (e.g., MSCI Emerging Markets).

These two indices together provide broad global diversification.

Developed Markets (70%)

The most commonly used index for developed markets is the MSCI World. There are many ETFs tracking this index, often with large fund volumes. The largest global ETF is also based on the MSCI World.
An alternative to the MSCI World is the FTSE Developed index. However, the selection of ETFs tracking this index is significantly smaller.
Another option is the Solactive GBS Developed Markets Large & Mid Cap index. However, the availability of ETFs tracking this index is also limited.

Emerging markets (30%)

Emerging markets are typically represented by the MSCI Emerging Markets index. This index is widely used by fund providers when they want to track the stock markets of emerging economies.

‼️Attention

The classification of countries into developed and emerging markets varies between index providers. For example, South Korea is classified as an emerging market by MSCI, but as a developed market by FTSE. Therefore, it is advisable to use the same index provider for both developed and emerging market allocations in your portfolio to maintain consistency.

Advantages

Advantages of the 70/30 Portfolio:

Globally diversified

The 70/30 portfolio offers broad global diversification by investing in both developed and emerging markets.
Low complexity

The portfolio consists of only two ETFs, making it easy to manage and implement without complexity.
Can be implemented with many ETFs

There is a large range of ETFs that can be used to implement this portfolio
Low costs
Political risk premium for emerging markets

Investment in emerging markets is expected to offer higher returns due to increased political risk, such as lower legal security in emerging countries. The political risk premium has historically compensated for the risk taken.
Good risk-return ratio

Disadvantages & Criticism

While the 70/30 portfolio has many advantages, it also has disadvantages.

Annual rebalancing needed
One-ETF version is even simpler
Higher political risk in emerging markets

Examples

It’s best to use 2 ETFs from the same index provider, as the country classification may differ. When assembling the portfolio, you can filter the ETFs in ETF search by criteria such as costs or fund volume.

Especially Cost-Effective 70/30 Portfolios

When investing, it’s important to keep costs as low as possible. Therefore, ETFs with a low TER (Total Expense Ratio) are recommended.

Developed market ETFs
Emerging Markets ETFs

70/30 Portfolios with Particularly Large Funds

The larger a fund is, the less likely it is to be closed. Often, large ETFs are relatively inexpensive because the fund company can manage a large ETF at a lower cost.

Developed market ETFs
Emerging Markets ETFs

Reference

70/30-Portfolio – das klassische Weltportfolio