If you want to invest your money for the long term, experts always recommend the MSCI World index. Recently there has been criticism of its composition. Is the index suitable for private investors?
Last year there were more stock savers in Germany than ever before, with almost 13 million people. According to the German Stock Institute, the number of investors who rely on exchange-traded funds, so-called ETFs, has recently risen sharply. These reflect stock indices such as the popular, internationally oriented MSCI World. But recently the index has come under criticism.
What is an ETF?
An ETF (exchange-traded fund) is an index fund that reflects the value of an index, i.e. a stock market barometer, one-to-one. The investment focus is on stocks, bonds, real estate or raw materials. Special topics such as dividend strategies, infrastructure or sustainability are also possible.
The world’s largest index providers include MSCI, FTSE, Stoxx and S&P. As with all investment funds, ETFs are special funds – this means that if the fund company goes bankrupt, the investors’ money is protected by law.
How are ETFs different from traditional mutual funds?
The basic idea of ETFs is to reflect the overall market. For example, if you only want to reflect the performance of all 40 stocks listed in the German leading index Dax, you would purchase a Dax ETF. In this case, experts speak of passive investing. Traditional investment funds, on the other hand, invest actively: fund managers consciously intervene and select. They sometimes act independently of individual indices.
ETFs are traded on every trading day, making them more liquid than classic funds. Compared to traditional investment funds, ETFs can be redeemed on the stock exchange not just once a day, but during regular trading hours. This makes them easier to monetize and at a cheaper price. There are now also hybrid forms between these two investment philosophies.
Are ETFs suitable for wealth creation or retirement planning?
Basically yes. Because of the long-term high return potential, internationally diversified, stock-based products are particularly suitable as a supplement to other investments such as bonds, real estate or precious metals. “In addition to good daily money and fixed-term deposits, stock ETFs are an important part of the recommendations for simple, self-tailored investments,” says Hendrik Buhrs, bank and stock market expert at the money guide Finanztip.
For those who don’t yet own any securities, such ETFs are “a good way to get started, which combine stocks from the largest companies in the world.” In this way, the risk of loss would be spread across many shoulders. According to Buhrs, a savings plan makes sense, especially for long-term wealth accumulation. All you need is a securities account.
How high are the costs?
Compared to actively managed funds, ETFs have a structural cost advantage because, for example, fewer shares are bought or sold. In addition, fund managers do not have to pay for expensive research. As a result, the overall costs are usually low. According to the consumer advice center, the administration fee is usually less than 0.5 percent per year.
Actively managed equity funds charge an average of just over 1.5 percent. Nevertheless, there are certain cost differences for ETFs depending on the fund provider, investment focus and fund size.
Why is there criticism?
Critics criticize the exact composition of the individual indices. The MSCI World, for example, only takes industrialized countries into account and does not take into account the emerging markets, some of which are booming. In addition, the MSCI World is based on the market value of the shares. As a result, the index is dominated by stocks from the USA and thus in particular by the highly volatile technology stocks.
The economic strength of individual countries, however, is ignored as a possible weighting factor. Investors who are dissatisfied with the MSCI World as an index can choose ETFs based on other stock market barometers or put together an individual portfolio from individual funds.
How has the MSCI World performed recently?
In the weak stock market year of 2022, the MSCI World came under greater pressure with a loss of 19.5 percent than the Dax or the US leading index Dow Jones Industrial. Since the beginning of the year, however, it has performed better than both indices.
What is the long-term balance sheet of the MSCI World?
For investors, the longer-term view is likely to be more important than short-term fluctuations. “Over the past 50 years, widespread, long-term and regular saving in stocks has paid off,” writes the German Stock Institute. Anyone who saves a fixed amount in MSCI World shares every month benefits from the price development and dividends of companies from over 20 industrialized countries.
For example, with a savings period of 20 years, you could earn an average return of 8.6 percent per year on the money you invested. In the worst case, the annual return was 2.2 percent, in the best case it was 15.4 percent.