What you miss out on when you buy a global tracker fund

Global tracker funds and ETFs (exchange-traded funds) are some of the most popular investments. But despite the name, they can leave you lacking in some areas of the market.

For example, among AJ Bell DIY investors, Fidelity Index World is one of the most-purchased funds. It is based on the MSCI World index, so investors can get cheap, simple access to almost 1,250 companies across 23 countries via the fund.

• Read: Investors' favourite tracker funds go head-to-head

But it doesn't give you everything in terms of every country or sector.

The way the MSCI World index is built means that the largest companies make up a bigger proportion, which in investment jargon is called ‘market-capitalisation weighted’.

Trillion-dollar companies like Nvidia, Apple, Microsoft and Amazon make up a big part of the index, and in the case of MSCI World, the top 10 companies take up 30% of the index.

Lack of exposure to China, UK and EMs

The majority of these big companies are based in the US, which is why most global tracker funds are around 70-75% invested in the US market alone. This concentration results in your global tracker fund giving you mostly US equity exposure and just a little for most other countries.

In the Fidelity fund, you only get about 6% in Japan and 3.4% UK stocks, just ahead of Canada and France.

You don’t get any exposure to emerging markets, which include China, India, Taiwan or South Korea, because MSCI World only covers ‘developed markets’. Note that in some other global funds South Korea would be included as it is sometimes classified as a developed market depending on the index provider, such as the FTSE.

This leaves you out of the world’s second largest economy (China), one if the fastest growing economies (India) and major semiconductor producers (TSMC in Taiwan as well as Samsung and SK Hynix in South Korea).

When AJ Bell previously looked at what to own after you’ve bought a global tracker fund, AJ Bell’s Head of Investment Research Paul Angell touched on this allocation conundrum and flagged that it’s important to consider some deliberate non-US investments. This would give geographic diversification, as well as different sector and economic drivers “rather than relying so heavily on US technology shares”.

Because the global equity market is so dominated by US technology giants, stocks sectors like energy, materials or utilities are underrepresented in comparison. They each account for around 2-4% of the MSCI ACWI. This means limited investment in areas such as oil and mining, which can be strong drivers for returns and act as diversifiers.

Some other passive options to bridge these gaps could be the Vanguard FTSE 250 ETF and Vanguard FTSE Developed Europe ex UK ETF to give both UK and European exposure, areas which also tend to be higher in energy and utility stocks versus tech.

For that missing EM piece, the iShares Core MSCI EM IMI Acc ETF, all of which feature on the AJ Bell Favourite Funds list.

Alternatively, some active funds rated by the Investment Team include: Fidelity Special Situations, Janus Henderson UK Responsible Income, WS Gresham House UK Smaller Companies, Fidelity Special Values, JPMorgan Emerging Markets Growth and Income, covering non-US and less-tech heavy markets.