Which Index funds to invest in?

Linton

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

InvesterJones

michael1234 said:

InvesterJones said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

Interesting. Nevertheless, it remains the case that investing in trackers does seem to apply an artificial skew if there are lots of folk doing the same thing.

No it's the opposite - a market cap weighted index is the only way to avoid an artificial skew. Anything other than market cap weighting proportions starts to skew it, and can end up changing the relative proportions of stocks if enough people do the same.

GeoffTF

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

If Stock A has twice the market cap of stock B, a market weighted tracker will put twice as much money in stock A as Stock B, but it will put the same percentage of the market cap in both stocks. Suppose that stock A is a conglomerate consisting of two equally valued stocks A1 and A2. A1, A2 and B will all receive the same additional investment. Actually, for every buyer there is a seller, so none of the stocks actually receive any additional investment. The prices will nonetheless rise if the only sellers are reluctant sellers, and the only sell orders in the order book are above the market price.

Market weighted trackers are takers of the market prices for the stocks that they hold. The market prices of those stocks are set by the other traders, i.e. the active investors in the broadest sense. If you underweight or overweight the US, you are an active investor in that sense. In aggregate, these active investors track the market weighted index.

InvesterJones

Linton said:

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

It reflects the real risk-return as valued by the consensus of all traders. Is there another measure of 'real world' or 'safely balanced' that you prefer? Remember it's only the equity part of a portfolio - the increased risk of stocks is compensated for by a decreased price for the expected return. Last report I saw from 2024 showed there was more money in fixed income overall than in equities.

michael1234

GeoffTF said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

If Stock A has twice the market cap of stock B, a market weighted tracker will put twice as much money in stock A as Stock B, but it will put the same percentage of the market cap in both stocks. Suppose that stock A is a conglomerate consisting of two equally valued stocks A1 and A2. A1, A2 and B will all receive the same additional investment. Actually, for every buyer there is a seller, so none of the stocks actually receive any additional investment. The prices will nonetheless rise if the only sellers are reluctant sellers, and the only sell orders in the order book are above the market price.

Market weighted trackers are takers of the market prices for the stocks that they hold. The market prices of those stocks are set by the other traders, i.e. the active investors in the broadest sense. If you underweight or overweight the US, you are an active investor in that sense. In aggregate, these active investors track the market weighted index.

It sounds like you know or have thought about this a lot more than I have. I followed your example extension up to and including A1,A2 and B and agree all three should then (everything else being equal) rise by the same amount.

The amount they rise is related to the amount of new money wanting to buy those stocks. If trackers represent a substantial amount of new investment, then all three will go up by an equal amount which may well be in a manner unrelated to what is actually happening to any of those 3 companies. So if the status quo is Apple, Microsoft et al are over priced, then the trackers have the affect of making relative movement difficult because the pump money in at the current set ratios (2:1 in our example above).

michael1234

InvesterJones said:

michael1234 said:

InvesterJones said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

Interesting. Nevertheless, it remains the case that investing in trackers does seem to apply an artificial skew if there are lots of folk doing the same thing.

No it's the opposite - a market cap weighted index is the only way to avoid an artificial skew. Anything other than market cap weighting proportions starts to skew it, and can end up changing the relative proportions of stocks if enough people do the same.

They maintain the status quo which is itself an artificial skew.

GeoffTF

InvesterJones said:

Linton said:

Just noticed - the MSCI World Index is now 72% US, ie  2-3 times the whole of the rest of the world put together.  The magnificent 7 represent 23.5% of the index, about 1/3rd of the US component. Does this reflect the real world? Is it a safely balanced portfolio?

It reflects the real risk-return as valued by the consensus of all traders. Is there another measure of 'real world' or 'safely balanced' that you prefer? Remember it's only the equity part of a portfolio - the increased risk of stocks is compensated for by a decreased price for the expected return. Last report I saw from 2024 showed there was more money in fixed income overall than in equities.

Global fixed interest $145.1 trillion in 2024.
Global equities $126.7 trillion in 2024.

https://www.sifma.org/resources/research/statistics/fact-book/

The US is about half the global bond market:

https://www.vanguard.co.uk/professional/product/etf/bond/9685/global-aggregate-bond-ucits-etf-gbp-hedged-accumulating

About the Magnificent 7:
https://www.home.saxo/en-gb/learn/guides/equities/magnificent-7-stocks-what-they-are-and-why-you-should-care
There are good reasons for their large market capitalisations. People have been saying that the Magnificent 7 are over valued for a long time. So far it has been bad news for those who have bet against them, but nobody knows what will happen in the future.

GeoffTF

michael1234 said:

InvesterJones said:

michael1234 said:

InvesterJones said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

Interesting. Nevertheless, it remains the case that investing in trackers does seem to apply an artificial skew if there are lots of folk doing the same thing.

No it's the opposite - a market cap weighted index is the only way to avoid an artificial skew. Anything other than market cap weighting proportions starts to skew it, and can end up changing the relative proportions of stocks if enough people do the same.

They maintain the status quo which is itself an artificial skew.

Exactly, Assuming that it is an artificial skew. The US is about 60% of the global equity market:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/portfolio-data

The Magnificent 7 are about a third of that, i.e. about 20% of the global equity market. I agree that looks excessive even for quasi-monopolies. That is, however, only about 12% of a 60/40 portfolio. Less if you have a bit of home bias. Even a big hit to the Magnificent 7 is not going to hurt too much, unless it brings down a lot more with it.

masonic

michael1234 said:

InvesterJones said:

michael1234 said:

InvesterJones said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

Interesting. Nevertheless, it remains the case that investing in trackers does seem to apply an artificial skew if there are lots of folk doing the same thing.

No it's the opposite - a market cap weighted index is the only way to avoid an artificial skew. Anything other than market cap weighting proportions starts to skew it, and can end up changing the relative proportions of stocks if enough people do the same.

They maintain the status quo which is itself an artificial skew.

The only skew can come from active investment. And it is not a good idea to get rid of that. Some companies are worth more than other companies for good reason. If active investors start selling their holdings in a company, then its weighting in the index will fall proportionately. It will fall out of the index and be sold by a tracker before every active dollar is removed from it. I suppose the point at which a stock enters or exits an index is where passive investments can create a distortion.

The more active dollars that are allocated intelligently the better. The fun thing about guessing games is that, in aggregate, participants are often more accurate than a typical individual in the cohort, but investing is not completely devoid of a skill element.

If you want to learn more about passive investing, then Smarter Investing by Tim Hale is a good read.

InvesterJones

michael1234 said:

InvesterJones said:

michael1234 said:

InvesterJones said:

michael1234 said:

GeoffTF said:

If you buy a global tracker, you are allocating your money in the exactly same way as the market as a whole. That should not push up the percentage price of US stocks any more than it pushes up the percentage price other stocks. You do, however, increase demand for global equities in general. If demand increases more than the supply, that will lead to an increase in the price of the market as a whole.

Is that correct? If we have two stocks whose fundamentals are the same but for whatever reason one's market cap is twice the other, then if most of the new money is global tracker money, then the higher valued stock will continue to rise at twice the rate of the other.

Ditto for entire markets or even groups of markets such as China vs US.

It doesn't alter the percentage, ie it maintains the status quo - if you invested 10% in stock A by market cap weighting your portoflio before, you'll still remain at 10% in stock A after all the market cap weighted inflows. 

Interesting. Nevertheless, it remains the case that investing in trackers does seem to apply an artificial skew if there are lots of folk doing the same thing.

No it's the opposite - a market cap weighted index is the only way to avoid an artificial skew. Anything other than market cap weighting proportions starts to skew it, and can end up changing the relative proportions of stocks if enough people do the same.

They maintain the status quo which is itself an artificial skew.

In what way is it artificial? Prices are set by what someone is willing to buy/sell for. That naturally results in market cap weighting.