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Where Does Your Global Stock ETF Weigh In?

October 18, 2017 - 0 comments

Before BlackRock Canada created the iShares Core MSCI All Country World ex Canada Index ETF (XAW) back in 2015, we had no decent way to test our lung capacity. Can you say the entire fund name in one breath? ETF investors also were forced to strain their mental muscles, deadlifting a combination of several US, international and emerging markets ETFs and wedging them into one unwieldy portfolio.

These days, investors have it easier with XAW’s broad stock market exposure to over 8,000 companies around the globe. It excludes Canadian companies, so you’ll need an additional ETF for those, but the fund is still a welcome addition to most modest-sized portfolios.

Then again, the easy route isn’t always the best route for everyone. For example, tell your personal trainer you don’t need those sit-ups because you already did some last week. As your portfolio increases in size, it may be cheaper and more tax-efficient to switch back to the old-school way of doing things (i.e. buying separate ETFs for your US, international and emerging markets exposure).

But how do you get started with a new portfolio fitness regime, once you’ve gotten so used to working with a single global equity ETF?

Sweating the details

As with any bundled product, it can be difficult to understand what you’re actually buying. Reviewing the ETF’s website is a good starting point, but to really get it, I recommend rolling up your sleeves and checking out the index that the fund tracks (as well as the individual US, international and emerging markets equity sub-indices).

Working out with the weight of the world

XAW follows the MSCI ACWI ex Canada IMI Index. “ACWI” stands for “All Country World Index,” which means that it includes companies in both developed and emerging markets. “IMI” stands for “Investable Market Index,” which means that it tracks large-, mid-, and small-sized companies.

The MSCI ACWI ex Canada IMI Index can be broken down further into three sub-indices:

  • The MSCI USA IMI Index (which tracks US stocks)
  • The MSCI EAFE IMI Index (which tracks stocks in developed markets, excluding North America)
  • The MSCI Emerging Markets IMI Index (which tracks stocks in emerging markets)

To determine how much weight each of these sub-indices represents in the overall parent index, we’ll follow these steps:

Step 1: Download the index fact sheet for the MSCI USA IMI Index and obtain the market capitalization in US dollars. (As of September 29, 2017, this figure was $25,959,263.89 million.)

Note: Instead of using MSCI’s search function on their site, I tend to just Google the name of the index, followed by “fact sheet”.

 

Step 2: Download the index fact sheet for the MSCI EAFE IMI Index and obtain the market capitalization in US dollars. (As of September 29, 2017, this figure was $16,867,756.65 million.)

 

Step 3: Download the index fact sheet for the MSCI Emerging Markets IMI Index and obtain the market capitalization in US dollars. (As of September 29, 2017, this figure was $5,761,814 million.)

 

Step 4: Add together the market capitalization figures from steps 1–3, which should equal $48,588,834.54 million. This is the market cap of the MSCI ACWI ex Canada IMI Index. (To double-check this figure, download the index fact sheet for the MSCI ACWI ex Canada IMI Index.)

 

Step 5: Divide the market cap of each sub-index by the market cap of the parent index. For example, to determine the weight of the MSCI USA IMI Index in the MSCI ACWI ex Canada IMI Index, divide $25,959,263.89 by $48,588,834.54, which equals 0.5343, or 53.43%. The MSCI EAFE IMI Index and the MSCI Emerging Markets IMI Index account for the remaining 34.71% and 11.86% of the MSCI ACWI ex Canada IMI Index, respectively.

Composition of the MSCI ACWI ex Canada IMI Index

Index Asset Class Number of Companies Market Cap (USD Millions) Allocation %
MSCI USA IMI Index US Stocks 2,446 $25,959,263.89 53.43%
MSCI EAFE IMI Index International Stocks 3,178 $16,867,756.65 34.71%
MSCI Emerging Markets IMI Index Emerging Markets Stocks 2,667 $5,761,814.00 11.86%
MSCI ACWI ex Canada IMI Index Global Stocks (ex Canada) 8,291 $48,588,834.54 100.00%

Source: MSCI index fact sheets as of September 29, 2017

 

Now that we know the weights of the various asset classes that XAW tracks, we can select the Canadian-listed and US-listed ETFs that most closely resemble the sub-indices:

Sub-Index Canadian-Listed ETF US-Listed ETF
MSCI USA IMI Index iShares Core S&P U.S. Total Market Index ETF (XUU) iShares Core S&P Total U.S. Stock Market ETF (ITOT)
MSCI EAFE IMI Index iShares Core MSCI EAFE IMI Index ETF (XEF) iShares Core MSCI EAFE ETF (IEFA)
MSCI Emerging Market IMI Index iShares Core MSCI Emerging Markets IMI Index ETF (XEC) iShares Core MSCI Emerging Markets ETF (IEMG)

Putting the program together

In my next blog post, I’ll show you how you can replace your XAW ETF holdings with a combination of these ETFs, to potentially pump up the money you might save on fees and foreign withholding taxes.

By: Justin Bender with 0 comments.
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