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Going Global With Some Domestic Protection

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U.S. stocks have continued their mastery over foreign counterparts this year, but there are still reasons to consider ex-U.S. stocks, including attractive valuations. One way of wading into international waters while still maintaining significant exposure to the U.S. is with the iShares MSCI ACWI ETF (NASDAQ: ACWI).

Due in large part to its 56% weight to U.S. equities, ACWI has returned 19.49% year to date. That lags the S&P 500 by 300 basis points, but ACWI is beating both the MSCI EAFE and MSCI Emerging Markets indexes.

The $10.74 billion fund, which turns 12 years old in March, is a broad fund in terms of sheer number of holdings at over 1,400. Despite the international exposure, ACWI's volatility metrics compare favorably with comparable domestic equity funds, as highlighted by a three-year standard deviation of just 11.33%.

Why It's Important

ACWI has some perks, but for some investors, it may be best deployed as a tactical trade because its long-term performance is decent though not spectacular.

“The fund’s long-term performance has not stood out against its peers,” said Morningstar in a research note. “Its total and risk-adjusted returns were similar to the world large stock Morningstar Category average between March 2008 and December 2018. Its actively managed competitors posted better performance thanks to superior stock selection. The fund’s ultralow 0.31% expense ratio is an advantage over the 1.1% category average fee, but comparable funds are available at a fraction of this cost.”

After the U.S., ACWI's largest country exposures are Japan, the U.K. and China, which combine for about 16% of the fund's weight.

What's Next

The obvious advantage of ACWI is that it eliminates the need for investors to hold a broad market domestic equity fund and a similar ex-U.S. product. However, ex-U.S. geographic diversity in the fund is somewhat questionable due to its low emerging markets exposure.

Additionally, the fund tilts toward large-cap domestic stocks, such as Apple Inc. (NASDAQ: AAPL) and Facebook Inc. (NASDAQ: FB).

“Market-cap weighting skews the portfolio toward large multinational corporations while underweighting companies that are smaller and potentially cheaper,” according to Morningstar. “Many of these large, global firms have operations and revenue streams that span multiple regions, so they don’t provide clean exposure to their home markets.”

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