There are stocks outside of Tel Aviv and the USA: Should you also diversify the portfolio to the global index?
From the perspective of Israeli investors, the market is often limited to the USA and Israel. However, experts suggest considering MSCI global indices to diversify risks and access the 40% of the global economy that many retail investors ignore.
From the perspective of retail investors in Israel who have entered the capital market in recent years, there are mainly two investment options: Israel or the USA. This is a common theme in living room conversations and interviews with young investors.
"When I talk to my friends, there is almost no one who does not know the S&P 500 or Nasdaq indices," says an investment manager in a conversation with Globes. "This is what they read on social media and in the newspaper, but beyond that, they don't know other indices."
In 2023-2024, local money flowed to Wall Street amid concerns over legal reforms, but in the last year and a half, it has been returning to Israel following impressive returns on the Tel Aviv Stock Exchange.
"Every year, about 80% of the new money that retail investors put into passive investments goes to the S&P 500. This year might be relatively weak, so it will be 60%," says Nadav Sahaik, manager of research and business development at Meitav mutual funds. The trend is understandable: in recent decades, US indices have repeatedly outperformed the rest of the world, making investing in the USA the "new gold standard."
Yet, for institutional bodies, the benchmark is often global stock indices, as they offer additional diversification beyond the USA. Sahaik explains that for a company to be included in the S&P 500, it must be a US resident and generate positive earnings per share for four consecutive quarters. "Therefore, giant companies like Taiwan Semiconductor (TSMC), South Korea's Samsung or SK Hynix, or the Dutch chip equipment manufacturer ASML are not traded in the S&P 500."
"Retail investors always chase past phenomena and current trends, ignoring future risks. This carries a high potential for losses because that is how you buy high and sell low," adds Dror Berger, an investment manager at Altshuler Shaham mutual funds.
Geographic and currency diversification
For investors looking to diversify outside the USA, it is worth exploring the MSCI World developed countries index, where the US weight stands at 74%. The index is composed of almost 1,300 stocks from 23 different countries.
Anyone seeking even higher diversification or exposure to large stocks like TSMC should look at the global index, MSCI ACWI, which includes emerging markets. It contains 24 emerging markets and at least 2,461 stocks. The US weight there drops to 64%, and exposure to emerging markets is about 10%.
"In terms of valuation, the forward price-to-earnings ratio for the next 12 months in the MSCI index stands at about 18.5 compared to 19.5 in the S&P 500. The global index is slightly cheaper today," adds Berger.
Another advantage is the currency issue. Exposure to MSCI indices provides geographic and currency diversification. "Since the beginning of last year, we have seen the dollar weaken by almost 8% against the global currency basket, which has hurt returns," Berger demonstrates. Unlike the S&P 500, which is fully exposed to dollar fluctuations, the global index includes companies denominated in other currencies, such as the yen or the euro.
"Protection and shock absorber"
The question of whether it is better to invest in the US stock market or specifically in the global index is not unequivocal. Although the USA produces about 30% of global GDP, there is no guarantee its absolute dominance will last forever.
"The moment you invest in the MSCI index, you let market forces determine the allocation," says Sahaik. "The average annual return in the USA was 13.6% over the last decade. Anyone who diversified outside the USA essentially 'paid' a 1%-2% loss in annual return. However, this is intended to reduce risk. If the Japanese, Indian, or Chinese markets become more dominant in the future, their weight in the global index will rise naturally. It's like an insurance policy in case the world changes again. The reward is protection and a shock absorber in case the USA is no longer the world's leading economy."
