Continuing on the theme from my last post, I’ve decided to explore what countries make up the Total World Stock market.

Exhibit 1 shows % of World Market Cap by country from two sources. The first one is an actual real-world product that anyone can invest in – Vanguard Total World Stock Index ETF (VT). It is based on an index managed by FTSE which decides which countries and companies make the cut. The second is a more theoretical calculation from the World Bank. As you can see, VT invests in “only” 46 countries, but they represent 96% of the true total world opportunity.

According to Vanguard’s website, VT provides “Broad exposure across developed and emerging equity markets around the world, including the United States.” This means that it’s not really a TOTAL World fund and it does not include “Frontier Markets” which account for the missing 4% in the World Bank column. FTSE’s country classification methodology assesses markets against size, basic governance and market infrastructure.

It’s really not a huge deal from investor’s perspective to be missing exposure to such countries as Kuwait, Nigeria, Argentina and Qatar. Do note, however, that these markets have performed quite well in the last couple of years, mostly driven by increasing interest and capital flow from foreign investors looking for more growth.

Another reason I show both data sets is to make a point about China. That country has a jumble of various share classes and makes investing by foreigners difficult. So the broad world and international stock index funds misrepresent the true weight of China’s stock market. This issue is quite interesting and complicated – I may do a separate post on it at some point, but consider this an FYI.

Exhibit 1

Exhibit 2 shows VT’s sector breakdown. Financials are by far the largest group, while technology has a much lower weight than the domestic indices.

Exhibit 2

Source: Vanguard.com

Another interesting data point is a share of World GDP by country (Exhibit 3). I also calculated the over/under representation of each country in the world stock market relative to its GDP. For example, United States account for 49% of the world market cap but “only” 22% of GDP. Thus, its market has 49/22 = 2.2x or 219% the weight that its economy does. The top and bottom five countries on that metric are highlighted in the table. As expected, mature stocks markets of North America and Europe take more than their fair share of the world capitalization (Taiwan and Hong Kong numbers are muddy with China relationship). While the less developed countries with high government ownership of productive assets are under-represented. One interesting observation for me was Germany with only 64%. Most likely this has to do with local market customs – many large family companies chose not to go public and remain unlisted. I bet it had something to do with them winning the World Cup!

Exhibit 3

Exhibit 4 summarizes the same data by region.

Takeaway

I’m not sure if there is any big “moral” or actionable conclusion here, but it’s a good idea to understand what you are buying. You should always take a look under the hood of any fund/ETF you consider investing in instead of just relying on its name.