Stretch Your Investing Horizons with Global ETFs

Global stock market indices are valuable for investors. Ground Picture/Shutterstock

For the beginning investor, there are many types of investments to consider, from bonds to mutual funds to stocks. And giving the stock investor even more choices are exchange-traded funds (ETFs)—baskets of securities that trade on stock exchanges like individual stocks.

ETFs are aimed at specific themes, objectives, or representation. There are thousands of ETFs, based on focus on technology, utilities, stocks that pay dividends, stocks in emerging markets, as those that include only the large so-called “blue chip” companies.

This article deals with ETFs that seek to mimic, represent, or otherwise track an overall market. That could be the S&P 500, the Financial Times Stock Exchange (FTSE), or even stocks around the world. An investor can gain exposure to a stock index through the market by purchasing shares of the ETF that tracks it.

Most Americans have their personal portfolios dedicated primarily to U.S. stocks, bonds, and other types of domestic investments such as U.S. real estate.

Another way to add diversification to your overall investing strategy is to invest in a global stock market index or indices through ETFs. More specifically, that means investing in indices that reflect or mirror global stocks in total.

What Is a Global Stock Market Index?

A global stock market index is a composite of stocks as it relates to an overall theme and objective expressed when the index was first established. The index represents a financial market cross-section—that is, the performance of a group of stocks reflected in a calculated number.

That number—the index value—is calculated by aggregating all the prices of the stocks included in the index. The aggregation can be based upon price-weighting, market capitalization, or can even be equal-weighted stocks (every stock gets the same weight, no matter its price or size).

Global stock indices span many worldwide markets and are essentially a benchmark of a specific market’s performance.

There is a relationship between ETFs and global stock market indices, but they are not exactly the same.

A global stock market index tracks a collection of stocks from all over the world, while an ETF may attempt to mirror—or is built to be patterned after—a specific index through assets that closely match the index’s composition

One example is the Vanguard FTSE All World ex-U.S. ETF, which has the objective of matching the FTSE All World ex-U.S. Index.

Investing in global stock indexes through ETFs can be a great way to diversify your portfolio by adding markets and economies beyond those here in the United States.

At the end of 2024, the U.S. market was worth $63 trillion, with U.S. listed companies making up more than 50 percent of the global stock market capitalization, according to Morningstar.

Regarding GDP, the U.S. GDP is just under $29 trillion which is a little more than one-fourth of the global GDP of around $110 trillion. That means investors should be looking beyond just U.S. stocks to ensure adequate portfolio diversification.

Global Stock Indices to Consider

MSCI World Index: The MSCI World Index is designed to cover roughly 85 percent of the market cap in larger companies in Europe, America, and Asia. Since indices are market capitalization-weighted, the largest companies carry the greatest weight, and the overall index provides a snapshot of the markets from a global perspective. In the past year, the index has returned 28.74 percent, while it averaged 13.14 percent over the past five years.

FTSE Global All Cap Index: Includes around 8,000 stocks, spanning small, mid-, and large-cap companies across 47 countries. The index is based upon a weighted market capitalization that reflects the performance of large, mid-, and small-cap stocks worldwide.

Covering both emerging and developed markets means that it is a comprehensive overall index. Since the index’s launch, it has trailed the FTSE All-World Index by nearly .50 percent annually. The average return has been 10.72 percent over the past five years.

FTSE All-World Index: Covers both developed and emerging markets. This index is a market-cap-weighted index that covers 90 percent of the 8 regions in the Global Equity Index Series (GEIS) universe: North America, Europe, Asia-Pacific, Latin America, the Middle East and Africa, Emerging Markets, Developed Markets, and Global. It tracks the performance of large and mid-cap stocks from the FTSE Global Equity Index Series.

The FTSE Global All World Index has shown a compound annual growth rate (CAGR) of approximately 17.7 percent over the past 5 years.

S&P Global 1200: Comprises 1200 of the largest companies in the world, across 11 developed and emerging markets. The index blends seven major indices representing 70 percent of the world’s market capitalization. Included are other indices: the S&P 500, S&P Europe 350, and S&P—TOPIX 150, looking at global equity performance as broadly measured. It is designed along market capitalization lines in terms of weighting, so the big players dominate the index. The index has averaged 9.27 percent over the past five years.

The Global Dow: Consists of the largest companies in the world. The Global Dow is an equal-weighted stock index featuring approximately 150 top companies worldwide. Its objective is to represent the global stock market, including large companies with international reach. It includes such firms as Nvidia, Meta, and Netflix.

The Global Dow index has shown a five-year return of approximately 8.84 percent as of Jan. 22.

Summary

Global stock market indices are valuable for investors because they provide a benchmark for assessing global market trends and economic health and a snapshot of the performance of major markets all around the world.

There isn’t a single “best” global stock index. The best for you will depend on your investment goals and preferences. Each index has its own characteristics and may perform differently based on market conditions. When choosing an index, it’s important to consider factors like your risk tolerance, investment horizon, and diversification needs.

Whether you invest directly in global index-tracking products or are using them for region-by-region performance comparisons, global stock market indices should be given consideration for inclusion in your portfolio, for two primary reasons:

• Diversification. Spreading your investments across different assets and sectors reduces overall investment risk and may lead to higher returns.
• Expensive U.S. stocks. U.S. stocks are overvalued compared to international stocks. The average international stock trades at a price-to-earnings (P/E) ratio of 15.4. On the other hand, the average S&P 500 stock currently trades at a relatively “high” P/E ratio of around 28.77.

Lastly, but importantly, you may have heard the phrase “When America sneezes, the world catches a cold.” In other words, as a global leader, other nations tend to follow the United States.

Whether positive or negative, what happens in America affects the rest of the world. If the U.S. stock market does pull back and correct in 2025, after two stellar back-to-back years, there is a good chance that short-term corrections will be experienced across all the global stock markets.

Nonetheless, in the long run, other nations’ stocks will still appear to be “on sale” compared to currently highly priced U.S. stocks.

Good luck, and may 2025 be your best investing year yet!

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