One of my friends asked me how MSCI World performed against the S&P 500 in the past.
He was deciding whether there is a solid reason to own a global large-cap and mid-cap index rather than a pure US index ETF.
MSCI only has the data for various developed worlds starting from 1970, so we can only compare the performance for the past 52.5 years.
We can compare the performance by taking the returns of the S&P 500 index minus the returns of the MSCI World index. If the returns are positive, the S&P 500 outperforms the MSCI World. If the returns are negative, the S&P 500 underperforms the MSCI World.
Since the US forms between 40% and more of the MSCI World at various past junctures, we can see how different the international developed stocks (does not include emerging markets) perform against the US.
How the S&P 500 did over one year versus the MSCI World if we roll month by month:
There are periods where the S&P 500 performs better than the MSCI World and also vice-versa.
Most of us tend to have a recency bias and would be quite influenced that MSCI World always did poorly compare to the S&P 500.
Now, let us take a look at the ten-year cumulative returns (as opposed to annualised returns) if we roll month by month:
The S&P 500 have some astounding ten-year outperformance.
Given this data, most people might conclude that they should just invest in the S&P 500.
But if I get the data right, the data show the periods where S&P 500 underperform for ten years. I wonder how many people can endure ten years of underperformance.
There are also periods where the MSCI World underperforms by ten years.
Whichever way, my firm conclusion is that most investors cannot endure ten years of underperforming unless they wise up and realise they can’t just evaluate based on this comparison.
You can purchase an ETF that tracks both the S&P 500 and MSCI World that is domiciled in Ireland through Interactive Brokers in a very low-cost manner. The preferred ticker for S&P 500 is the CSPX and the MSCI World is SWDA.
I do have a few other data-driven Index ETF articles. These are suitable if you are interested in constructing a low-cost, well-diversified, passive portfolio.
You can check them out here:
- IWDA vs VWRA – Are Significant Performance Differences Between the Two Low-Cost ETFs?
- The Beauty of High Yield Bond Funds – What the Data Tells Us
- Searching for Higher Yield in Emerging Market Bonds
- The performance of investing in stocks that can Grow their Dividends for 7/10 years
- Should We Add MSCI World Small-Cap ETF (WSML) to Our Passive Portfolio?
- Review of the LionGlobal Infinity Global – A MSCI World Unit Trust Available for CPF OA Investment
- 222 Years of 60/40 Portfolio Shows Us Balanced Portfolio Corrections are Pretty Mild
- Actively managed funds versus Passive Peers Over the Longer Run – Data
- International Stocks vs the USA before 2010 – Data
- S&P 500 Index vs MSCI World Index Performance Differences Over One and Ten Year Periods – Data
Here are some supplements to sharpen your edge on low-cost, passive ETF investing:
Those who wish to set up their portfolio to capture better returns believe that certain factors such as value, size, quality, momentum and low volatility would do well over time and are willing to harvest these factors through ETFs and funds over time, here are some articles to get you started on factor investing passively:
- Introduction to factor investing / Smart Beta investing.
- IFSW – The iShares MSCI World Multi-factor ETF
- IWMO – The iShares MSCI World Momentum ETF
- Investing in companies with strong economic moats through MOAT and GOAT.
- Robeco’s research into 151 years of Low Volatility Factor – Market returns with lower volatility that did well in different market regimes
- JPGL vs IFSW vs Dimensional Global Core vs SWDA – 22 years of 5-year and 10-year Rolling Returns Performance Comparison
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Tuesday 20th of December 2022
Great post mate! It has been a question in my head and you explored very well.
I have a tendency to decide to invest in USA + Emerging markets because I think it gives a better hedge against the potencial chances of American markets going lateral for 10 years.
I know that in 2000 - 2013 period the Emerging markets worked very well as a hedge against it but I don't know for past periods.
Have you thought about doing this comparison but using EIMI instead. It would be great!
For sure S&P500 will be one of the best investment on the long term that's why I want to stick to it plus using a kind of protection against lateral periods adding the Emerging markets but not lowering my expected returns adding developed countries that have not being growing for decades
Monday 26th of December 2022
HI Paulo, thanks I will do that if I can. Should not be a problem.
Saturday 30th of July 2022
Can you further elaborate on the significance of using one-year (roughly equal performance) vs ten-year returns (major overperformance by S&P 500) when comparing against MSCI World vs S&P 500?
By changing this comparison timeframe, the case seems to have swung in favor of S&P 500.
What is the takeaway for us as investors? Does it mean that over the long run it is still better for me to invest in S&P 500 assuming I have a long-term horizon (given the 10 year chart)? Or you mean to show that it doesn't matter between even if I chose MSCI World (given the one-year chart)?
Friday 5th of August 2022
@Kyith, much thanks for sharing your perspective and shedding more light on how to go about "interpreting" the graphs.
Personally I lean towards investing towards investing globally as well hence the recent outperformance of S&P 500 shown made me do a double-take.
PS: Love your reference on the source nation of vibranium :)
Wednesday 3rd of August 2022
Hi Felicia, we look at different time frame to gain different perspectives about how the market performs. A longer timeframe gives us an idea how the index did over a timeframe that is more important to many of us. Time is something that we cannot go back and change our investment decision. Each bar in the longer timeframe is ten years. Now you got to ask yourself if you investing S&P 500, there are so many chances after ten years you would do worse than Europe and Japan, what is the likelihood you will stick with the index. The data basically tell us that relative underperformance is to be expected, whether you invest in S&P 500 or expand into MSCI World. The more important thing is whether psychologically you can live through underperformance and stick with the investments.
My preference has always been to invest globally because while there are underperformance against S&P 500 like recently, it doesn't mean i earn poor returns. But if there is a country like China or Wakanda that became rather significant in contribution, then I want exposure to it. MSCI World is acceptance to have more humility that we do not know what is going to happen and try to hedge our bets better.