This is Why I don't Invest in the S&P500

Hello Stoic Investors,

Today I want to clear up some common questions that people often ask me about the S&P 500 and MSCI World.

For many, the S&P 500 seems like the obvious ETF choice for investing due to its impressive historical performance over the past 20 years.

But we can’t just rely on historical outcomes, because they may not always predict future success accurately.

In fact, consider this statistics:

Right now the US country accounts for 61% of the worldwide market capitalization, but 100 years ago it was just 15%.

On the contrary, the UK had a bigger portion in terms of stock market capitalization 100 years ago than now.

So, things can always change.

The S&P 500

The S&P 500 is an index that tracks the 500 largest US companies, in terms of market capitalization:

It means the number of shares multiplied by the price of a single stock.

In other words, the bigger the market capitalization is, the bigger the value of the company.

Looking at this chart, we can see an upward trajectory that shows how amazingly the S&P 500 performed in the past decade.

In fact, on average, it's a 14% return per year.

Amazing, right?

When we consider what's inside the S&P 500, the biggest 10 companies, like Apple, Microsoft, Amazon, Nvidia, and Alphabet, make up 30% of it.

This means out of all 500 companies, just these 10 are a big part.

The other 490 companies together make up the rest, which is 70%.

This shows how the investment isn't equally distributed among all the 500 companies, because a lot of it is concentrated in just a few big names.

And so, with the S&P 500 we are simply buying the biggest US companies, which means that we are exposing ourselves to the US in terms of performance.

The MSCI World

Now, let's look at the MSCI World.

It also performed well, almost like the S&P 500, as shown in this chart.

We only have data from the last 14 years because that's when this ETF started, on September 25, 2009.

This index tracks stocks from the 23 developed countries worldwide, and this is the main difference with the S&P 500.

As a matter of fact, with the S&P 500 you are fixed on the US, while with the MSCI World you are diversifying across countries.

The countries are included based on their market capitalization.

This means that the index includes the biggest stocks of each country depending on how big the overall stock market size of that country is.

If we look at the top 10 holdings of the MSCI World, we can see how similar they are to the top 10 holdings of the S&P 500:

Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta.

And so, the funny part is that even if this ETF includes 23 developed countries, the US accounts for 67%.

So, now you can understand that the two ETFs are more similar than you might think.

And the reason why the S&P 500 performed better than the MSCI World is because the global ETF includes other countries which underperformed the US.

In this way, the overall return was slightly lower.

And so, after this, you may think again that you want to buy the S&P 500, because it had a bigger return, right?

But in reality, there are some considerations to make.

What's better for you?

Overall, both investments are great choices, even if with the S&P 500 you get a higher return than the MSCI World.

We can say for sure that both investments are definitely better than just keeping your money in the bank.

But one important thing for sure you must avoid is to invest in both.

In fact, as we saw before, you are basically getting the same thing by 70%.

You should choose the S&P 500 if you believe the US will keep its stock market supremacy and if you are okay to not diversify geographically.

So, if China becomes the next big country, for example, with the S&P 500 you won't make returns in that country.

You need to manually switch somewhere else if the S&P 500 won’t keep overperforming, because it doesn’t get automatically updated as the MSCI World.

Instead, you should choose the MSCI World if you want to relax.

In fact, whatever country emerges as the next US you are covered.

 Also, you should choose it if you are okay to have a slightly lower return due to over-diversification:

The MSCI World didn’t overperform the S&P 500 because you are spread out in so many countries that some of them don’t perform, resulting in a lower return.

But taking the overall period, we are talking about a 1.5% difference, so it's not that much.

What do I do?

I use the MSCI World as part of my investments.

Given that it’ll be adjusting itself automatically, I won't touch it whatever happens in the future.

On top of that, I add more speculative investments that include US companies directly, to try getting a higher return from those.

So, note down these three key points and start investing today:

1. Don’t invest in both ETFs, because they are pretty much the same, with 70% of them overlapping.

2. Choose the S&P 500 if you believe the US will keep its stock market supremacy and if you are okay to not diversify geographically.

3. Choose the MSCI World if you want to relax but you are okay to have a slightly lower return due to over-diversification.