ACWX ETF: No International Stocks Delivered (NASDAQ:ACWX)
proposition
iShares MSCI ACWI ex US ETF (NASDAQ:ACWX) is a stock exchange-traded fund. This vehicle seeks to track the investment results of an index comprised of non-U.S. large- and mid-cap stocks. At first glance, the fund It is an interesting diversification tool that provides retail investors with exposure to international mid to large cap stocks.
The ETF comes from the iShares/BlackRock family and charges 0.34% on outstanding AUM. The analysis is as follows:
- Assets under management: $4.6 billion
- Sharpe ratio: 0.02 (3Y)
- Standard deviation: 16.9 (3Y)
- Annual volatility: 13.2%
- Return: 3%
- Leverage ratio: 0%
- Composition: International Stocks
- Expense ratio: 0.34%
The tracking index is the MSCI ACWI ex USA index, which includes both developed and emerging markets. The index is comprised of non-U.S. stocks from 22 developed markets and 24 emerging markets, with more than 2,000 constituents, or 85% of all stocks. The Global Ex-US Stock Markets MSCI ACWI Ex-US Index is calculated using a methodology that focuses on liquidity, investability and replicability.
The ETF is overweighted in Japan with 15% of its collateral, while the remaining covered countries make up 4-8% of the average fund. At first glance, this diversified approach appears to provide better risk-adjusted returns over the long term. Unfortunately, ETFs do not provide attractive results. Its standard deviation, as measured by a three-year lookback, is lower than that of the S&P 500 at 16.9, but its long-term 10-year annualized return is only 3.5%.
The fund’s beta is close to 1. That is, it moves in the same direction as the S&P 500, but has lower long-term returns.
Despite the performance of its Indian and Taiwanese assets, the fund has been on the decline over the past three years due to its exposure to China.
composition
The fund has a truly diverse geographical approach, with large developed countries having equal representation across the top five regions.
Japan has the highest presence at 15.19% of the portfolio, followed by the UK at 9.3% and Canada at 7.7%. It is interesting to note that the remaining jurisdictions outside of Japan have roughly equal weight in the collateral pool.
From a sectoral perspective, the financial sector represents the greatest concentration.
The financial industry accounts for 21.19%, the industrial industry accounts for 13.5%, and the information technology industry accounts for 12.7%.
In terms of individual names, you’ll find a handful of semiconductor companies in the top 10 names in the portfolio.
Taiwan Semiconductor appears as collateral at 2%, followed by ASML Holdings at 1.23%.
Long-term performance is disappointing
Through a one-year lookback, the fund is virtually flat while the S&P 500 surges.
Looking back five years, the story is quite similar.
Despite a variety of geographical approaches, the funding failed to deliver on a long-term basis. During that time, ACWX is up 11.85%, while SPY is up 81%.
What jurisdictions have been in operation recently?
One of the strengths of portfolio construction is diversification. Unfortunately for ACWX, diversification works against it. Over the past five years, we have seen a clear distinction between jurisdictions that performed and those that did not.
Among the selected cohorts, iShares MSCI India ETF (INDA) was the best performer in the five-year lookback, followed by iShares MSCI Taiwan ETF (EWT). One country that is noticeably underperforming in the ACWX ETF is China. The iShares China Large-Cap ETF (FXI) is down -47% in the five-year lookback. Think of it this way. The net gap between India and China exposure in INDA and FXI is almost 100% in absolute terms.
What looks good for institutions may not necessarily be right for retail investors.
Institutional investors may require international stocks to show ‘diversification’, but individual investors should really be concerned with returns. ACWX exhibits long-term annual returns close to 5% (over multiple economic cycles) with a very low Sharpe ratio. When US stocks are offering 8% plus, there is little to see in terms of improving retail portfolios with ACWX. Given its high correlation with SPY, this fund will likely move in the same direction as the market rather than providing any type of ‘hedge’.
We are more inclined to build diversification into international equities with a few jurisdictional ETFs to choose from after the fundamental analysis has been completed. As can be seen above, China has significantly disrupted ACWX over the past five years, while other Asian jurisdictions have. Choosing India, Taiwan and Japan through their respective ETFs will give you purely superior results than leveraging ACWX. Therefore, we believe it is best for retail investors to pick and choose from a number of well-researched jurisdictions rather than buy and hold with ACWX.
Institutional investors, on the other hand, like the deep liquidity offered by ACWX and the diversification the fund offers, despite its low annual total returns. For such investors, a ‘one-stop shop’ like ACWX may be the answer, even if it is not profitable.
Political risk is not priced correctly
One of the key takeaways from looking at ACWX is that political risk is not priced appropriately in global stock markets. The fund covers global jurisdictions, including emerging markets. One of the biggest drags on the fund’s performance is China. While fundamentally very sound, Chinese stocks have suffered significant P/E declines due to political factors. Let’s take a look at Tencent (OTCPK:TCEHY), one of the key Chinese stocks in the portfolio.
The company is a global company with a market capitalization of over $300 billion, and while its EPS has nearly tripled over the past five years, its P/E ratio has plummeted from over 30x to the current 12x. why? Political and jurisdictional risks. If the market perceives that political factors have a limiting effect on the company’s future earnings power, it will assign a lower P/E ratio.
Expect more here too. With Sino-Taiwan tensions rising, ACWX is expected to perform severely poorly if China decides to invade. There are significant political risks in all emerging markets (EM) jurisdictions, and an attack without warning can have serious consequences. Look at what happened to Russian stocks after Russia invaded Ukraine, or what happened to the Israeli stock market after Israel’s military action.
conclusion
ACWX is a stock ETF. The fund tracks the MSCI ACWI ex USA index, which includes non-U.S. stocks from 22 developed and 24 emerging markets. ACWX is perceived as a diversification tool for institutional investors, but individual investors need to go beyond the theoretical and be practical. The fund has failed to deliver strong returns over the long term due to its underappreciation of political risk, particularly in the emerging markets region. A striking example of this risk is seen in Chinese stocks, which have fallen nearly -50% over the past five years despite improving fundamentals and earnings. Instead of choosing a large aggregator like ACWX, it is best for individual investors to conduct country-specific research and then select jurisdiction-specific ETFs like EWJ or INDA. Conversely, institutional investors will likely continue to hold this name due to its liquidity and ability to check the boxes in terms of exposure to non-US stocks.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.