What is the MSCI World index?

The MSCI World is a stock market index covering large and mid-sized companies in 23 developed countries — around 1,400 companies, representing roughly 85% of the freely tradable market value in each of those countries. It is published by the index provider MSCI and is the most widely used benchmark for global equity portfolios; many of the largest ETFs sold in Europe track it.

Despite its name, it does not cover the whole world: emerging markets such as China, India and Brazil are not included, and neither are small companies.

How it is weighted

The MSCI World is weighted by free-float market capitalization. Each company's weight is its market value — counting only the shares available for public trading — divided by the total for all companies in the index:

w_c = \frac{\text{Free-float market cap}_c}{\sum_j \text{Free-float market cap}_j}

The index is reviewed every quarter, when companies are added, removed or re-weighted.

What it contains

Because it is weighted by market value, its country and sector weights follow the size of the markets:

Countries: the United States makes up around 70%, followed by Japan, the United Kingdom, Canada, France, Switzerland and Germany with a few percent each.
Sectors: information technology is the largest at around a quarter, followed by financials, industrials, health care and consumer discretionary.
Companies: the ten largest, mostly US technology companies, make up around a quarter of the index.

Which version

The index is published in several versions, which matter when comparing returns:

Version	Dividends
Price index	not included
Net total return	reinvested after a standard withholding tax
Gross total return	reinvested in full

ETFs are usually measured against the net total return version. The index is calculated in several currencies; for a euro investor the return in euros is the relevant one. With the exchange rate quoted in US dollars per euro:

1 + R_{\text{EUR}} = (1 + R_{\text{USD}}) \times \frac{\text{EUR/USD}_{\text{start}}}{\text{EUR/USD}_{\text{end}}}

A simple illustration

In a year in which the MSCI World returns 10% in US dollars and the euro rises from 1.10 to 1.21 dollars:

1 + R_{\text{EUR}} = 1.10 \times \frac{1.10}{1.21} = 1.00

For a euro investor the return is 0%: the stronger euro absorbed the whole gain.

Why it is so widely used

Broad diversification across hundreds of companies and many countries in a single fund.
Low-cost ETFs, with running costs from around 0.1% a year.
A clear yardstick for comparing global stock portfolios.

Its main limitations are the heavy weight of the US and of technology, and the absence of emerging markets and small caps. The MSCI ACWI and the FTSE All-World include emerging markets as well.

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