Investors looking for total market exposure excluding U.S. stocks have a myriad of options in the world of exchange traded funds. One of the more well-known options is the iShares MSCI ACWI ex US Index Fund (NASDAQ: ACWX).
ACWX Stands Out
The iShares MSCI ACWI ex U.S. ETF, which is over 8 years old and has more than $1.9 billion in assets under management, offers investors exposure to developed and emerging markets equities while excluding U.S. fare. Although ACWX is a combination developed and emerging markets ETF, the fund is dominated by developed markets as highlighted by a combined weight of nearly 28 percent to the U.K. and Japan. China is the ETF's largest emerging markets allocation at just under 7 percent.
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Home to 1,157 stocks, ACWX is a cap-weighted ETF, and the bulk of its lineup is devoted to large- and mid-cap names. With a fund of this nature, that ensures ample exposure to familiar multinational companies, such as Novartis AG (ADR) (NYSE: NVS), Toyota Motor Corp (ADR) (NYSE: TM) and GlaxoSmithKline plc (ADR) (NYSE: GSK).
“The countries where these firms are listed are not necessarily indicative of the economic exposure they provide. This broad market-cap-weighted portfolio promotes low turnover and effectively diversifies company-specific risk. The fund’s top 10 holdings account for less than 10 percent of the portfolio, compared with the category average of over 25 percent. Yet, its weighting approach could tilt the portfolio toward names as they become larger and more expensive and away from firms as they become smaller and cheaper, which may have higher expected returns,” said Morningstar in a recent note.
As Morningstar noted, ACWX is not a currency hedged ETF, which works against the fund when the dollar is strong. However, with the dollar currently laboring well below the highs seen last year, the weak greenback works in favor of international exporters that derive significant percentages of their revenue from the U.S. as is the case with many of ACWX's developed market holdings.
ACWX has trailed the MSCI EAFE Index in recent years because of the former's emerging markets exposure. However, with developing economies rebounding this year, ACWX is outpacing the developed markets benchmark. Still, this underscores the point that ACWX is potentially vulnerable to hawkish Fed action.
“Central banks in the U.K., the eurozone, and Japan are all using aggressive monetary policies to keep interest rates low in an effort to simulate demand. If rates in those markets stay low, while rates rise in the United States, the U.S. dollar could strengthen, which would hurt the fund’s performance,” added Morningstar.
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