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Analysing what makes up a global stock market index

Index tracker funds are a popular way to invest. We take a closer look under the hood of a major global index.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

A diverse world comes with lots of different opportunities for investors.

Investing in different stock markets can be a great way to tap into certain trends and geographies. Since no two are the same, we think most investors should have broad investment portfolios with different drivers of growth from across the globe.

We cover the bread and butter of global investing and share different ways to get involved.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. All investments will fall and rise in value, so you could get back less than you invest.

What are stock exchanges?

Stock exchanges are where investors buy and sell investments like shares and bonds. They used to be physical venues where traders used open outcry to signal information and execute deals. Today, electronic systems have made trading far more efficient and cheaper.

The London Stock Exchange (LSE) is one of the oldest around and can trace its roots back to 1698. Companies from around the world can be listed on the LSE so long as they meet certain requirements. It’s also one of the most international, being home to around 2,000 companies from more than 100 different countries – these companies trading on the exchange make up the UK stock market. But compared to the size of the global stock market, the UK is merely a drop in ocean.

Globally, there are tens of thousands of companies that have shares trading publicly. The most common way of investing in an entire stock market is through an index.

What is an index and why do they matter?

An index is a comprehensive representation of a particular market. You can’t invest directly in an index, but funds that aim to track an index can be a good low-cost way to invest.

Below are some of the most widely used indices from around the world:

  • FTSE All-Share (UK)
  • Hang Seng (Hong Kong)
  • S&P 500 (US)
  • TOPIX (Japan)

In this article we consider the FTSE Global All Cap for the global stock market. It tracks the performance of over 9,000 companies, small and large across both developed and emerging markets.

FTSE Global All Cap regional breakdown (%)

Source: FTSE Russell, 31 July 2021

True of most indices, the FTSE Global All Cap index’s regional proportions are based on the total value of companies in a country, rather than the size of an economy. The US makes up for nearly 60% of the index. It’s home to some of the biggest companies in the world like Apple, Microsoft, Amazon and Facebook. In fact, nine out of the ten biggest companies in the index are based in the US, making up 12.9%.

Some of the biggest companies in the world can be found in Asia. Japan and China collectively account for 10.2% of the index. Asia’s largest listed company resides in Taiwan – technology company Taiwan Semiconductor Manufacturing.

Closer to home, European giants the UK, France, Switzerland and Germany make up 11.4% of the global stock market. The remainder of the index is spread across 39 countries.

FTSE Global All Cap industry breakdown (%)

Source: FTSE Russell, 31 July 2021

The index also has a diverse mix of sectors. There are more than 1,700 industrial companies, which is more than any other sector, but these only make up around 14% of the index. Technology and telecommunication companies take the top spot though at just over a quarter of the index. In contrast, real estate, utilities and energy have the smallest representation.

Find out more about the benefits of diversification

Over half the index constituents are classed as ‘small’. That means on average they’re around $1.5bn in size, compared with $31.5bn for the average larger company, which is why large companies make up over 70% of the total index.

The dividend yield for the global stock market is currently 1.67%, as at 31 July 21. Remember yields are variable and not a reliable indicator of future income.

Number of companies of different sizes

Source: FTSE Russell, 31 July 2021

Company size weightings

Source: FTSE Russell, 31 July 2021

What investors need to keep in mind

Funds that track an index, also known as index tracker funds or passive funds, are constructed according to the size of companies. It isn’t necessarily a reflection of their investment prospects.

There are also other points to consider. For example, as the US makes up a large part of the global stock market, it also makes up much of a global tracker fund. The same can be said for larger companies.

It’s always worth looking at how a tracker fund is invested and how it could complement other investments before considering it for your portfolio. For example, a global index like the one above could be blended with others investing more in higher-risk smaller companies or emerging markets.

See our Wealth Shortlist tracker funds

The other side of the coin

Active funds can also be a good way of investing in different parts of the world. They’re run by a professional manager aiming to pick companies they think will perform better than the broader market. They won’t always get it right though, meaning they won’t always perform as well as the market.

Because the global stock market is so broad, we think it offers great opportunities for active managers. Our Wealth Shortlist contains global funds chosen by our analysts for their long term performance potential, both actively and passively managed, and could be a good place to start your research.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

FIND OUT MORE ABOUT THE WEALTH SHORTLIST

What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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