We think this exchange-traded fund offers a sensible approach to gain exposure to the global equity market, but there are lower-cost and better-performing direct alternatives. The fund’s portfolio aims to represent approximately 85% of the global developed equity market. By construction, in comparison with other offerings in the global large-blend Morningstar Category, the MSCI World Index will always have a slight overweighting to large caps at the expense of mid- and small caps, and an underweighting to emerging markets. However, it stands as an adequate representation of the opportunity set available to investors.
At 0.30%, the fund’s ongoing charge is above average when compared with other world equity ETFs. The fund has shown superior risk-adjusted performance during the trailing three- and five-year periods relative to peers in the category, which include actively managed funds. Other funds tracking the same benchmark have delivered similar performance in 10 years, ranking in the first quartile.
In terms of tracking performance, it has lagged both its benchmark and direct competitors. We attribute this to the fact that Luxembourg-domiciled funds pay the full withholding tax on US equities, which in this case represents more than half of the fund portfolio. Moreover, the fund is fully replicated, which constrains the portfolio managers.
The MSCI World Total Net Return Index includes approximately 85% of the equity market capitalisation of 23 developed-markets countries. At this writing, the index is composed of approximately 1,640 stocks. Components must meet minimum criteria for liquidity, as well as foreign ownership restrictions. The securities are weighted by free-float market capitalisation. The index is reviewed and rebalanced quarterly. The U.S. accounts for approximately 55%-60% the index value, followed by Japan (8%-10%), the United Kingdom (6%-8%), and France (3%-5%). Financial services are the index’s largest sector, at 18%-20%, followed by information technology (13%-15%) and consumer discretionary (12%-14%).
Portfolio concentration is very limited, with the top 10 holdings accounting for 9%-11% of the total index value. Top securities include Apple with a 1%-2% weighting, followed by Microsoft and Exxon Mobil at approximately 1%. We have a favourable view of the structured beta & indexing team at UBS. The team has remained stable and can draw on a wealth of industry experience when managing funds.
To conclude, we have a positive view of the strategy, as it has proven difficult to beat by active managers over time. Nevertheless, this is not among the cheapest and best-performing MSCI World Index ETFs, which limits its Morningstar Analyst Rating to Bronze.
