What percentage should I allocate to MSCI World vs. MSCI Emerging Markets?

A typical portfolio for investors looking for global equity exposure through accumulating index funds is a combination of the iShares MSCI World and the iShares MSCI Emerging Markets. Which percentage should you allocate to which?

My preference is to have exposure to each country’s companies in proportion to each country’s contribution to the world economy. There are many ways to measure that contribution but my preferred way is through the proportion of their free-float market capitalization – the total value of the shares available to be sold to the general public. In essence this is what a fund like the iShares MSCI World, does within its holdings: the US is around 55% of the world’s free float market capitalization therefore 55% of the assets of the fund are from US companies.

I think you should follow the same reasoning – free float market capitalization – to decide the percentage to allocate to MSCI World and MSCI Emerging Markets. You can find the adequate percentage of each region in the index provider’s (MSCI) website.

According the MSCI website, MSCI World represents 88% of their global index, MSCI ASCWI. While MSCI Emerging Markets would represent the remaining 12%. I think you should allocate the same percentage to these funds: 88% for the iShares MSCI World and 12% to the iShares MSCI EM. Keep in mind that these allocations change with time as the market capitalization of the regions change, so you will have to periodically rebalance your portfolio to match the updated allocations.

Source: MSCI

You could also simply buy the iShares MSCI ASCWI but that fund has a higher TER, 0.6%, than what you would get if you buy each fund individually according to the percentages I suggested (TER = 0.88 * 0.2 + 0.12 * 0.18 = 0.1976 %, 3 times cheaper).

There are other methods to decide the allocation to emerging markets: GDP, economic exposure, full market cap.

Source: MSCI

Alternatively, you may have a specific point of view on the future returns of a specific region leading you to increase your exposure to it.

All in all, I prefer free float market capitalization because that is how most popular indexes are built (e.g. S&P 500, MSCI World). Moreover. I honestly don’t have an informed opinion on how these markets will evolve in the future to justify deviating from the market’s opinion of their value.

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