How can you invest with low risk and high returns? This is what the book “Successful Scientific Investing” by portfolio manager Andreas Beck is about. FOCUS Online publishes an excerpt in which Beck explains how investors can invest in the world company.

What all crises in the economy have in common is that, due to some disruption, investors are no longer willing to provide companies with capital on the previous terms. If you look at an individual company, it is actually threatened with insolvency during the crisis (system crash = static concept of a crisis). The market changes during the crisis: Only companies that can adapt to the new requirements survive.

If, on the other hand, you look at the world economy (in the sense of the world corporation, i.e. the approximately 8000 liquid listed companies in the world), then we find a different situation. For the global economy, a crisis means an adjustment process. This can be painful and can last for many months. At the end of this process, the world economy will have changed. Some companies will no longer exist, others will be added. Value chains will have changed.

The pattern of the crisis is always similar, but the concrete events and results are not. One can predict that in the end there will be an adjusted world AG; one cannot predict what this new world AG will look like in detail. This phenomenon – the jump from a static (here a single company) to a dynamic system (here the world AG) – is also called “emergence” in the natural sciences. A dynamic of its own only develops in systems above a certain level of complexity. The system begins to regulate itself and adapts to a changed environment without external control.

In summary:

Mapping the world economy in an index – neither the MSCI World Index (approx. 1600 companies) nor the MSCI All Country World Index (approx. 2700 companies) do this satisfactorily. Only the MSCI All Country World Investable Market Index (in short: MSCI ACWI IMI) completely maps the world AG with over 8,000 companies. This index can be invested in Germany via the ETF SPDR MSCI ACWI IMI UCITS ETF (WKN A1JJTD).

Let’s take a closer look at this ETF. This allows us to address a few key questions when choosing ETFs. The costs (TER) of the ETF are a fair 0.40% p.a. a. So far so good. However, there is a misconception among retail investors. A broadly diversified ETF (even a physically replicating one) typically doesn’t invest in the full index. This is not possible at the low cost. Instead, the fine art of the ETF industry is to create a selection of values ​​from the index that generates a price development that is as similar as possible to the underlying index. You aim for the lowest possible tracking error with as little effort as possible, but you don’t guarantee it.

With the SPDR MSCI ACWI IMI UCITS ETF, a look at the fact sheet shows that the ETF is actually not invested in around 8000, but in 1815 (as of October 31, 2022) assets. Whether this selection – especially in crises – is actually as robust as the index itself is uncertain. The risk is not borne by the ETF provider, but by the investor.

I will use an example to explain that this topic should not be underestimated. Based on the multi-factor model, there are an above-average number of market phases in which small companies achieve an excess return (factor premium) compared to large companies. However, broadly diversified ETFs usually prefer the large companies in their underlying index for their investments. This means that in phases without a factor premium, the tracking error is low and the ETF seems to optimally reflect the index. But during periods of factor premium, when it would be of particular interest to investors, the tracking error is suddenly high due to the ETF’s concentration on the large companies in the index.

In my experience, the actual returns of ETFs vary quite a bit. Surprisingly, there is no connection between the underperformance of the index and the TER of an ETF. It therefore makes little sense to base your ETF selection on the TER, which is very low for almost all ETFs anyway.

For investing in the global economy in a portfolio, two indices and thus two ETFs should therefore be used. This achieves very good coverage of around 5,000 companies. The MSCI All Country World Index is ideal for large and medium-sized companies (large / mid caps). There are four high-quality ETFs available for this index from iShares (NYSE: iShares), SPDR (NYSE: SPDR), Xtrackers (NYSE: Xtrackers), and Lyxor (NYSE: LYX00C). The TER of the ETFs is currently between 0.20% p. a. and 0.45% p.p. a. The first three ETFs are physically replicating.

The MSCI World Small Cap Index can be used for smaller companies (small caps). There are two high-quality ETFs available from iShares (NYSE: iShares) and SPDR (NASDAQ:SPDR). The TER is currently between 0.35% and 0.40%. Both are physically replicating. That’s all you need for the simplest possible investment in the world economy.