Page 37 - DIY Investor Magazine | Issue 32

Asia Pacific Markets – just over a third of the market cap, mostly driven by Japan and Australia
HOW MUCH EXPOSURE WILL I HAVE TO DIFFERENT MARKETS IF I BUY A EUROPEAN ETF?
European Equities Illustration - Market Capitalization for EUROSTOXX 600
By investing in European Stocks you cover over 65% of all EAFE countries; the broadest European Indices (EuroStoxx 600 or FTSE Developed Europe) will provide exposure to Western Europe including the UK, which usually represents the largest allocation (between 22.5 and 25%).
Other countries that have a high allocation include France (15- 17.5%) and Germany (12.5-15%).
HOW MUCH EXPOSURE WILL I HAVE TO DIFFERENT MARKETS IF I BUY A PACIFIC ETF?
Asian Equities Illustration - Market Capitalization for MSCI Pacific Index
The rest of the EAFE countries are located in Asia; a single ETF tracking all of them is a rare fund.
Such a fund may track the ‘all-in one’ MSCI Pacific Index; this benchmark mainly includes Japan (65-70%) and Australia (20- 22.5%). You will also gain marginal exposure to equities listed in Hong Kong (7.5-10%) and Singapore (2.5-5%).
2. ECONOMIC EXPOSURE
So far we have covered the Market Capitalization of European and Asian Developed Markets’ stocks.
However, the real economic exposure of the companies will be different in a couple of ways:
Source of Revenues – As companies become more global they derive their revenues from international markets. Currency diversification will also increase.
Compared to US companies, investing in European Stocks means increasing revenue sources from Emerging Markets, too.
Sectoral Exposure – The sectoral mix can be even more impactful than looking at the countries where stocks are listed or derive their revenue from.
What active bets are you implicitly making by investing in ex- US Developed Markets?
Consider a few facts before investing in an EAFE Fund (comparisons vs a World ETF represented by MSCI ACWI):
• Many European and Asian companies have been at
the vanguard of globalization and exhibit considerable diversity in their geographic scope today. It applies across different industries - eg Unilever, Siemens, LVMH or Toyota.
• By reducing your exposure to the US, you will almost equally increase economic exposure to Europe (14%) and Asia (12%). Exposure is defined by company revenue source country.
• It may not be intuitive that exposures increase similarly even though Europe accounts for 65% of the overall market cap. This is because most of Asia Pacific revenues (over 70%) are sourced locally while European companies are more diversified
• Your relative exposure to emerging markets will reduce, albeit Europe and Asia are still relatively more exposed than the US (24% vs. 16%).
• To keep emerging market exposure intact, you will need to add EM ETF to compensate for the over allocation to developed markets.
• The ratio will be around the same as EM’s share in MSCI ACWI since EMs derive almost all their revenues locally (over 80%).
• Most importantly, you will make sectorial bets including being relatively underweight (i) IT Stocks including Apple, Microsoft or Nvidia and (ii) Communication Services including Alphabet, Facebook or Netflix
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DIY Investor Magazine · Feb 2022