“Five reasons why the MSCI World is not a perfect investment”

Many investors have become fans of the MSCI World over the past decade. Quite a few rely exclusively on an ETF on the MSCI World for their retirement provision. This is not a good idea, says Ali Masarwah, fund analyst and managing director of the financial services provider envestor.

10 March 2025 FRANKFURT (envestor). For several years now, your regular stock market columnist has been warning against putting all your eggs in one basket when investing and only investing in an ETF on the MSCI World. In times when neo-brokers and fair fund platforms offer free savings plans on ETFs and one-off investments also cost less than the proverbial peanuts, there is no reason to leave out second-line stocks, emerging markets and cheaply valued shares. “But the MSCI World has done very well!” is the typical objection to this warning. Since the beginning of this year, this assertion has been on shaky ground.

In 2025, the long-term outperformance has been relativized, even reversed in the short term. While the DAX gained 15.5 percent, the MSCI World lost 3.7 percent. This was enough to turn a long-term outperformance into its opposite. As a result of the weak performance of US equities, the heavily US-heavy MSCI World fell back and is now also lagging behind the DAX in the five-year balance sheet. Calculated in euros, the MSCI World has risen by 14.3% every year since the beginning of March 2020, while the DAX has risen by 14.8% annually. I explain in five theses why the MSCI World is not a good index for ETF investors even after the correction - and should also be reconsidered as a benchmark for actively managed funds.

1. Today, the MSCI World is neither a good benchmark for actively managed funds nor a good underlying for ETFs. At over 70 percent, the US ratio is now too high, as is the tech ratio of over 30 percent - Meta and Alphabet are classified as telecommunications companies, while Tesla belongs to the consumer sector. However, all of these stocks are part of the Magnificent 7. Investors who buy MSCI World ETFs today in the belief that they are making a diversified investment are mistaken. Whoever says “MSCI World” today does not mean diversification, but rather the outperformance between 2009 and 2024. But the past performance, see my comments above, is not only past, but dead as a doornail.
    
2. The MSCI World stands for the mistaken belief of the media and investors that funds are like “silver bullets” - you only have one shot and it has to be a good one. As a one-product solution, however, the MSCI World is not a good solution: no emerging markets, no small caps and the aforementioned cluster risk of tech and the US. I will never understand why many investors insist on a one-stop store. Why not build a diversified ETF portfolio with 4,5 or even 6 ETFs? Emerging markets, small caps and Europe, Japan, Asia (developed) as adequate counterparts to a significantly reduced US share should characterize the equity portfolio.
    
3. The MSCI World represents the mistaken belief of many investors that the MSCI World is a kind of God-given rule of investing. However, it is in fact a strategy, and strategies can work - or fail. Buying an ETF on the MSCI World today is not passive investing, but an active decision to invest in the most expensive market in the world and largely ignore Europe and Japan and second-line stocks such as emerging markets. Eurozone equities now account for around ten percent of the weighting of the MSCI World. One should not take the belief in the efficient market hypothesis too far.
    
4. Using the MSCI World unquestioningly as the perfect ETF underlyings leads to possible misunderstandings about its characteristics. The advantage of liquidity and the momentum factor, which in principle are inherent in market capitalization, is offset by the disadvantage of the fixation on standard growth stocks, which has made the index very lumpy after the long bull market in US platform companies. In a bear market, the momentum factor sometimes turns into its opposite: Yesterday's winners lose disproportionately.
    
5. Even those who recognize the weaknesses of the MSCI World often draw the wrong conclusions: He or she goes in search of the “perfect MSCI World replacement”. But all single-product solutions have disadvantages and are therefore sham solutions: Many are more expensive than ETFs on the MSCI World and/or over-engineered, i.e. too complex because they want too much at once. And what about the MSCI World competitors MSCI ACWI, FTSE World or other total market ETFs? Because they are all capitalization-weighted, they all work on the same principle. Therefore, these indices are also false friends.