American stocks have become a headache for many investors. Over the past 15 years, they have raced ahead of other major markets, to the point where they now account for more than 70% of the MSCI World index.
If you manage a fund benchmarked against that, you cannot afford to have too little in the US, because if it keeps beating everything else, your performance will lag badly and your job will be on the line.
This may be why some managers are saying that Donald Trump’s threats of raising tariffs on imports mean that the US will keep beating the world – they need a plausible reason to keep buying the US as it rises. In theory, tariffs should be bad news for growth and for stocks – being likely to hurt trade and push up inflation – but America is exceptional, they argue: it’s the world’s largest economy, the owner of the global reserve currency, the key source of import demand and so on. The rules that apply to other countries don’t apply to the superpower and its companies should suffer less than those in a trade war.
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This feels one-sided. Setting aside economic arguments around the impact of tariffs, note that US firms have been huge beneficiaries of globalisation, which could now make them equally huge targets for other governments. Domestically, there are obvious dangers in Trump’s arbitrary policies and whether he or some of his appointees will take aim at sectors such as tech or healthcare, or at any company that annoys him. Yes, the US could still beat the world – it remains the most innovative economy – but there are also reasons to fret about the tail risks that come with having 70% of assets in one country. So paring back the US can be about managing risk rather than being outright bearish.
How to hold US stocks
While most global funds, passive or active, are likely to have around 70% in the US, there are alternatives with lower exposure. The recently launched Invesco MSCI World Equal Weight ETF (LSE: MWEQ) invests the same amount in each stock, rather than weighting by market capitalisation. Since America has more giant companies and higher like-for-like valuations across the market, this brings the US share of the index down to 45%. The downside of equal-weighted strategies is that turnover is higher. Until there’s a real-world performance record for this ETF, we can’t see how well the manager manages to optimise the portfolio-management process to reduce the drag of trading costs from this.
I’d like to have the option of a GDP-weighted index fund, which uses capitalisation weighting on a country level but sets each country’s share of the index in line with its share of world GDP. The MSCI World GDP Weighted has 49% in the US, while the MSCI ACWI GDP Weighted (which includes emerging markets) has 30%. Both have beaten the equal-weighted indices over 10 years, but there are still no ETFs that track them. But we can combine regional or country ETFs to get closer to these weights. At its simplest, you could hold a US fund alongside the Xtrackers MSCI World ex US ETF (LSE: EXUS) in a 30%/70% or 50%/50% mix, or whatever ratio you prefer.
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