The stock market isn’t the real economy. And neither is market-cap weighting - which is often the enemy of diversification.
Indices like the MSCI Saudi-Arabia or MSCI Poland currently consist of a 48% or 39% (respectively) stocks from the Financial Services sector alone. And for both, the biggest single component stock has a share of more than 15% of the index.
You arguably would increase your economic diversification by choosing to only own a subset of the total stock markets.
Other popular indices are less concentrated. But at an 11% combined for Apple and Microsoft in the MSCI USA, you would still increase your diversification by choosing not to own them.
It doesn’t need to be the case. There are funds that you tilt to factors and still be sector-neutral.
The irony in that is that it seems to negate most of the factor premium, i.e. makes you off worse:
Agreed, that’s why I own VT. Also, in VT, the allocation to the US whales isn’t that dramatic. Honestly, it wouldn’t ruin my day if Apple went broke tomorrow at 3.35%, and there’s always the next Apple waiting.
But yes, equal weight does intrigue me to some extent. It’s also done quite well in the past. But I still place more trust in the wisdom of the market
Update: I went and switched from CSIF Equity World MSCI Quality ex CH to Swisscanto Equity World ex CH @ 0.00% TER.
I believe it is a better investment (for my goals) because:
0% TER (Swisscanto) is better than 0.13% (CSIF MSCI) and lower fees are guaranteed, unlike returns.
Quality / factor tilts are not necessarily a better investment. It’s essentially using past data to predict the future. Furthermore, profit isn’t necessarily the best indicator : most tech companies were not initially profitable. Market cap weight already factors in the ability for a business to drive profits based on its PE ratios, quality etc.
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