MSCI World vs MSCI ACWI

Source: Bloomberg

When comparing the MSCI World Index vs the MSCI All-Country World Index the other day, I was surprised by how closely they’ve tracked each other over the past 30+ years. Since their inception in 1988, cumulative returns differ by just 5% while the annualized difference is .02%!

The MSCI World Index only includes stocks of “developed” markets (think the US, Western Europe, Japan, Canada, Australia, etc), while MSCI ACWI includes stocks in both developed and emerging markets (think China, India, Brazil, etc). Since emerging markets have bounced around between 10-15% of global market cap in the past decade (and were much smaller prior to that), the risk and returns of the MSCI World and MSCI ACWI indices have been nearly identical.

What does this mean for investors? Firstly, I think its safe to say that selecting a vehicle and cost structure is more important than deciding between these two indices. A large index fund may have the edge with MSCI ACWI since it will likely have access to local exchanges in emerging markets, while an index-based SMA may hold an edge in MSCI World. Every investor and situation is different and these differences are likely larger than any difference between these two indices.

Secondly, if all else is equal, I would personally opt for MSCI ACWI due to its inclusion of emerging markets. If EM declines as a percentage of global market cap, then MSCI ACWI will likely match MSCI World. If it outperforms and increases as a percent of market cap from 10-15% to 20% or 25%, then there is some relative upside without much relative downside. Of course, all else is rarely equal.

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