What no one explains properly – Buying Best International ETFs is about right benchmarks (MSCI vs FTSE)

Choosing the Best International ETFs for your Equity Portfolio

Key Takeaways

  • International ETFs can be confusing due to different naming conventions of the Index Providers – I had a deep dive into the way they work, and hope you can benefit from it as well
  • ETFs can be divided into (i) Developed vs Emerging and (ii) Small to Large Caps
  • By understanding how these are divided you can control the allocation to them in your portfolio – read why it may be beneficial in a long term investment portfolio
  • International Equity ETFs usually track either an MSCI or FTSE Benchmark Index – understanding them is the most important step in choosing an International ETF
  • There are some differences in coverage and country classification – try to use the same family of indices 
  • Periodic rebalancing of your portfolio is a great way to control your allocation to Emerging/Developed Equities over time and to observe how these markets perform  
  • You will find recommended ETFs that also include Funds that exclude your country (International ex-US, ex-UK) so that you can control allocation to your domestic equities

Making sense of World Equity Indices

I will start by describing the structure of the Market using MSCI Indices since they have a longer history

Following this introduction I will show differences with the FTSE Global Index Series to let you decide which one is more suitable as a benchmark for your ETFs

World Equity ETFs are usually divided based on two main characteristics:

  • The type of Economy
  • The size of the Companies

23 Developed Economies and 26 Emerging Countries

VTI UCITS etf equivalent for UK and European investors
Source: MSCI, Bankeronwheels.com, data as of August 2020.

What are these?

Countires and their Equities are broadly divided into three categories: 

  • A developed market is a country with high income, and openness to foreign ownership, ease of capital movement, and efficiency of market institutions
  • An emerging market has some characteristics of a developed market, but does not fully meet its standards
  • frontier market is more developed than the least developing countries, but too small, risky, or illiquid to be generally considered an emerging market

Developed Markets represent 90% of All World Stocks

best international ETFs - emerging vs developed markets
Source: Bankeronwheels.com, data as of August 2020

Frontier Markets are tiny and not represented in ACWI Indices – for this you would need a special ETF (but this remains niche investing) – see the FTSE breakdown in the section below

Breaking down Global Equity ETFs by company size

Large and Mid Caps represent 85% of all World Equities

best international ETFs - MSCI world msci world imi msci all country acwi merging markets msci em imi large small micro cap ETF index investing bogleheads
Source: MSCI, Bankeronwheels.com; As of 28/06/2019
  • Large and Mid Caps are part of MSCI World (don’t ask me why MSCI call Developed Countries ‘World’) and MSCI Emerging Markets Indices (85% of World Capitalization)
  • Small Caps are included in “Investable Market Index” aka IMI Indices and together with the above categories represent the entire World Market (outside of micro caps)

Easiest option - buy a Global Market ETF covering all Economies and all sizes of Companies. Any ETF that covers All Country World or ALl Country World IMI (or FTSE Equivalent as described below) should be efficient and will align your portfolio with the market allocation to those countries

Country Allocations

US represents over half of Global Equities, followed by Japan and China

China is relatively small in Global Equity ETFs ...

best international ETFs - msci acwi all world - iShares MSCI ACWI ETF acwi - country breakdown - index investing - bogleheads
Source: Bankeronwheels.com, data as of August 2020
  • It may be surprising that Chinese Stocks represent just over 5% of Global Equities
  • Despite being some of the largest exchanges in the world, China’s stock markets are still relatively young and do not play as prominent a role in the Chinese economy as America’s do in the U.S. economy – in China only a small percentage financing is funded by equity. Chinese corporations rely much more heavily on bank loans and retained earnings

... but represents c. 40% of Emerging Market Equity ETFs

Country weighting in MSCI Emerging Market Equity Index
best international ETFs - msci emerging markets - iShares MSCI Emerging Markets ETF EEM - country breakdown - index investing - bogleheads
Source: Bankeronwheels.com, data as of August 2020

The more advanced option is to break down a Global Index in your portfolio into Developed and Emerging and control on your own what percentage you want to allocate to them

MSCI vs FTSE - Key differences

FTSE has larger coverage if you don't invest in a World index that includes Small Caps

Now that I have covered how MSCI Indices work let’s have a quick comparison with FTSE. 

Most International Equity ETFs will track either MSCI or FTSE. 

Here is how they differ:

  • FTSE includes more small caps in the “non IMI” Indices – This is an important factor because the largest International ETFs usually exclude small caps (aka IMIs). MSCI global indices capture 85% of the universe by market cap in non-IMI Index and exclude the bottom 15% as small-cap firms. FTSE global indices track 90% world markets and exclude the bottom 10% as small-cap firms. This difference is not important if you invest in the broader Investable Market Indices (IMI) to cover small caps, too.
  • They can treat China differently – MSCI has been feeding Chinese A-shares since June 2018 and increased the 5% cap over time. FTSE introduced these companies a year later and has a 5.5% cap at this time. Currently China is 40% of MSCI and 43% of FTSE (if we exclude Korea from MSCI these will be very similar)
  • The providers classify Emerging Countries differently – For example, FTSE indexes classify South Korea or Poland as developed markets while MSCI considers them as emerging markets

For a long term investor covering the entire market differences are marginal but try to be consisent when you invest granually e.g. don't mix the two since you may invest in Korea or Poland twice or not at all

FTSE Index Structure

FTSE Structure is broadly simiar, above I have highlighted some differences between these providers

Global Equity Index Series Breakdown​

ftse etf index - global small cap all world global micro cap global all cap developed total cap emerging total cap frontier
Source: FTSE Russell, September 2019

MSCI vs FTSE - Performance comparison

ftse vs msci global geisac all world acwi emerging developed large mid small caps perfromance since 2003
Total Returns since 2003. Source: FTSE, MSCI, Bankeronwheels.com

Performance is broadly similar, note the following:

  • The difference between both providers is negligable in the long run
  • Your ETF Tracking Difference may be more important than the difference between MSCI and FTSE performance
  • If you select an ETF that tracks an index without small caps be cautious about allocation since small caps are much more volatile but shouldn’t be ignored since they add incremental returns
  • The same observation applies to Emerging Markets that can materially outperform developed markets during certain periods of time

What are the Best International ETFs?

Below are recommended ETFs based on your country – you can choose some ETFs that exclude your country so that you can allocate a different amount to your local Equity Market(s)

Summary of popular International ETF Benchmarks (MSCI)
msci acwi vs msci world
Summary of popular International ETF Benchmarks (FTSE)
popular international equity ETFs tracking FTSE Indices - summary

A word on currencies

You can choose from other jurisdictions as well available with your broker but different regulatory treatment may apply (e.g. non UCITS Funds for Europeans) – currency of the ETF is not really an issue over the long term since the assets you invest in are denominated in local currencies

Read more about how to select an ETF including often confusing aspects such as currencies

What if I'm in Europe and I buy USD Emerging Market ETF? The intermediate currency (here USD) between your currency (EUR) and the final assets (Emerging Market Currencies) has no effect whatsoever on returns to the investor who buys e.g. Emerging stocks. The stocks are priced in local currencies and on purchase, the investor exchanges some of their local currency for an equivalent value of ETF priced in USD, and on sale the reverse happens. In between purchase and sale, the investor holds only Emerging Market assets, so other currencies besides the investor's own are irrelevant

RECOMMENDED ETFs - SELECT YOUR COUNTRY

  • US
  • EUROPE
  • UK

ALL IN ONE INTERNATIONAL ETFs

If you want to hold all of your international equities in one fund (including US) look here for detailed review

There are ETFs that give you global ex-U.S. exposure (assuming you already invest in USA Markets separately) within a single ETF

Recommended ETFs:

  • MSCI ACWI IMI ex-US – iShares Core MSCI Total International Stock ETF (IXUS)
  • MSCI ACWI ex-US – iShares MSCI ACWI ex U.S. ETF (ACWX)
  • MSCI ACWI ex-US – SPDR ACWI ex U.S. ETF (CWI)
  • FTSE Global ex-US All Cap  – Vanguard Total International Stock ETF (VXUS)

EMERGING & DEVELOPED MARKETS ETFs

Developed Markets:

  • MSCI EAFE IMI (DM ex-US) – iShares Core MSCI EAFE ETF (IEFA
  • FTSE Developed All Cap ex-US – Vanguard Developed Markets ETF (VEA)
  • FTSE Developed ex-US – Schwab International Equity ETF (SCHF)

Emerging Markets:

  • FTSE EM All Cap – Vanguard Emerging Markets ETF (VWO)
  • MSCI EM – iShares Emerging Markets ETF (EEM)
  • MSCI EM IMI – iShares Core (MSCI IMI) Emerging Markets ETF (IEMG)

 

ALL IN ONE INTERNATIONAL ETFs

If you want to hold all of your Global equities in one fund, there 6 UCITS ETFs that give you global exposure  within a single ETF

I have written extensively about this here

Unfortunately, I am not aware of ETFs that cover all markets but specifically exclude Europe

EMERGING & DEVELOPED MARKETS ETFs

Developed Markets: (these include European Equities)

  • MSCI World – iShares Core MSCI World ETF (SWDA)
  • MSCI World – SPDR MSCI World UCITS ETF (SWRD)
  • FTSE Developed – Vanguard FTSE Developed World UCITS ETF (VHVG)

Emerging Markets:

  • MSCI EM IMI – iShares Core MSCI EM IMI ETF (EIMI)
  • FTSE EM – Vanguard FTSE Emerging Markets UCITS ETF (VFEG)

 

ALL IN ONE INTERNATIONAL ETFs

If you want to hold all of your Global equities in one fund, there are 5 ETFs that give you global exposure  within a single ETF including the UK

I have written about this extensively here

If you want to exclude the UK, here is a good option:

  • FTSE All World – Xtrackers FTSE All-World ex UK UCITS ETF  (XDEX(excludes UK)

EMERGING & DEVELOPED MARKETS ETFs

Developed Markets: (these include UK Equities)

  • MSCI World – iShares Core MSCI World ETF (SWDA)
  • MSCI World – SPDR MSCI World UCITS ETF (SWRD)
  • FTSE Developed – Vanguard FTSE Developed World UCITS ETF (VHVG)

Emerging Markets:

  • MSCI EM IMI – iShares Core MSCI EM IMI ETF (EIMI)
  • FTSE Emerging Markets – Vanguard FTSE Emerging Markets UCITS ETF (VFEG)

APPENDIX

Developed Markets ETFs

Country weighting in MSCI Developed Markets Equity Index
best international ETFs - msci developed markets world - iShares MSCI World ETF URTH - country breakdown - index investing - bogleheads
Source: Bankeronwheels.com, data as of August 2020
how to build an investment portfolio option 2

This guide explains the Equity Part of the World Cyclist Portfolio – read here about how to set up an easy and flexible Long Term Portfolio for goals such as Financial Independence

Popular Guides

  • GROW
  • PROTECT

My fundamental reviews of Equity ETFs and Asset Allocation include:

My fundamental reviews include:

DISCLAIMER

All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice

Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate

I only talk about products, services and companies I use / would use myself. Read the full disclaimer


HAVE A QUESTION ABOUT INVESTING?

Drop it below or if you enjoyed my work and found it useful please do leave a comment or share it with someone that may benefit from it – I am grateful for your feedback

Note that this website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis

Stay safe & healthy, 

Raph

 

FAQ

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) and covers 80% to 85% of market capitalization in each country.

The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 26 Emerging Markets
(EM) countries. It covers 80% to 85% of all market capitalization.

FTSE All World Index captures Developed and Emerging Markets Large and Mid Sized Companies except Small Caps. This image shows how it differs from FTSE Global All Cap Index and other FTSE Indices like FTSE Emerging Markets and FTSE Developed Markets

The providers classify Emerging Countries differently. For example, FTSE indexes classify South Korea or Poland as developed markets while MSCI considers them as emerging markets -FTSE includes more small caps in the Global Indices that include mostly Large and Mid Caps -They can treat China differently – MSCI has been feeding Chinese A-shares since June 2018 and increased the 5% cap over time. FTSE introduced these companies a year later and has a 5.5% cap at this time. Currently China is 40% of MSCI and 43% of FTSE (if we exclude Korea from MSCI these will be very similar)

MSCI ACWI IMI captures Developed and Emerging Markets Large, Mid Sized and Small Caps. This image shows how it differs from MSCI ACWI and other MSCI Indices like MSCI World, MSCI Emerging Markets or MSCI World Small CAp

MSCI EAFE is an Index for US Investors willing to invest in developed countries ex-US. MSCI World covers all developed countries including the US

Both include Large and Mid Caps and do not include Small Caps.
However, MSCI ACWI covers both Developed and Emerging Markets while MSCI World only covers Developed Markets

FTSE All World captures Developed Markets and Emerging Markets for Large and Mid Caps.
FTSE Global All Cap captures all Markets including Small Caps.

Both capture only big and mid caps (smallest companies all left out)
However, FTSE All World also includes Emerging Markets while Developed World doesn’t.

Both capture only big and mid caps (smallest companies all left out)
However, FTSE All World also includes Emerging Markets while MSCI World doesn’t

Both include Developed and Emerging Markets
However, FTSE All World leaves out the smallest caps while MSCI ACWI IMI includes them
If you want to capture all caps with FTSE choose FTSE Global All Cap

Both include Developed and Emerging Markets. However, MSCI ACWI IMI also includes small caps that MSCI ACWI leaves out

REACH FINANCIAL INDEPENDENCE SOONER

Invalid email address
Exclusive features will be available to members only. And as you've seen, High Quality Research you won't get anywhere else. Unsubscribe at any time.
Subscribe
Notify of
guest
25 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Yasu
Yasu
3 months ago

Thanks, this is useful. I just helped my mother (who lives in Belgium) rearrange her retirement savings, by selling all of her high-fee actively managed funds and buying into some ETFs. Within her equity holdings, we went for 90% FTSE Developed (ER of 0.12%) and 10% FTSE Emerging Markets (ER of 0.22%), since that seems to be somewhat cheaper than the one-fund solution of FTSE All World (ER of 0.22%), while still requiring only minimal rebalancing effort. I chose the 90/10 ratio based on the current split of VTWAX which puts around 10.4% in emerging markets (although I’m not sure… Read more »

DKwon
DKwon
3 months ago

Thank you for this! Learning a lot on why things are weighted the way they are. 😻
Also interested in following the economies with a low CAPE and investing in their index. (Korea was one with FLKR and EWY)

Ferdi
Ferdi
2 months ago

Thanks a lot, very useful insights. Currently I’m very heavy on S&P 500 but I have been thinking about transferring some funds to a FTSE All World ETF for a while. Your post just made me consider it seriously.

Kri
Kri
2 months ago

Interesting write-up, thanks. Any take on Solactive, the German low cost index providers? Some funds, like PRAW and ETLQ (Xetra) are using Solactive, and it seems to push the TER down, compared to (what I’m guessing is) the more expensive indexing options provided by FTSE and MSCI

Jan
Jan
1 month ago

Thank you for the excellent article, very helpful information. 

I’m looking for diversification as almost 100% of my current portfolio are US stocks. If I understand correctly, an all world index ETF wouldn’t solve my problem as the majority of those indices are US equities. 

Are there any “all world ex-US” ETFs around for non-US investors? (I’m from a smaller European country and therefore doesn’t have access to US ETFs)

Jan
Jan
1 month ago
Reply to  Banker on Wheels

Raph,

Thanks for the answer.

In the last few years I’ve started to build a dividend paying portfolio that’s why my current holdings are US stocks. It provides a nice growing cash flow so I’m not aiming to sell those.

The main reasons I started to look at ETFs are diversification and to save the time which I spend on finding good individual companies.

I’m considering adding STOXX Europe 600 and Emerging Markets ETFs to my holdings. Adding these to the individual US stock would cover most of the MSCI ACWI index without selling any of my current holdings.

Jan
Jan
1 month ago
Reply to  Banker on Wheels

Yes, that would exclude Japan while it was not my intention. I’ll consider the method you mentioned in your first answer.

Cheers,
Jan

Jack
Jack
1 month ago

[Long post alert] Thank you for this article, I have no idea how I’ve found this website, but glad I did! I have a very niche query which relates to Index funds vs ETFs; I just had a thought y’day where-in, I will pay platform charges to hold index funds with my provider (Cavendish Online for example), whereas I because of the rise of 0% commission platforms available in the UK such as Trading212 and Freetrade, I can effectively pay no platform charges to buy and hold an equivalent vanguard ETF, giving me a 0.25% discount on the platform charges,… Read more »

Jack
Jack
1 month ago
Reply to  Banker on Wheels

Thanks for getting back to me Raph,
From the above, my interpretation of your text seems to be to (more-or-less) ignore the OCF and head straight for the KIID and look at the average deviation from the fund/ETF’s index? An average over the past 5 years should provide adequate confidence in making a firm decision?
Am I also correct in thinking that this value would contain the OCF and ALL other fees not clearly disclosed within other documents?

Jack
Jack
1 month ago
Reply to  Banker on Wheels

Thanks Raph,
I too, am surprised at how little coverage this point gets despite all the rage to go ‘as cheap as possible’ on trackers!

Would keep my eyes peeled; Unfortunately, I do not get notifications through email for every new comment, so have to just keep checking every few hours.

Ben
Ben
1 month ago

Hi Raph
Love your content – very useful when building your own portfolio!
Ben

Jorge Cordeiro
Jorge Cordeiro
1 month ago

Huge tips, thanks for helping me to understand the merits of having an ETF!! Before I only had stocks and now I’m currently going for Developed + Emerging!
I do have one question – How one should now when to rebalance the % between dev and emerg?

CuteBear
CuteBear
19 days ago

Hi, Raph I did a little search between the 1st Vanguard FTSE All-World UCITS ETF (IE00B3RBWM25) and the 2nd Vanguard FTSE All-World UCITS ETF Accumulating (IE00BK5BQT80). I think the first option should be my choice, but I have a question about option 2. If it becomes an ETF over time, option 1 will become larger. What to do with the option in this case if it occupies 80 percent of my portfolio. For me, option 2 would also be acceptable due to dividend accumulating, which option 1 does not. But 1 is higher and TER -0.4 at least for now.… Read more »