What it means
Most national indices, such as the S&P 500, cover a single country. A world index combines the stock markets of many countries into one number, giving a picture of global developed-market performance.
The S&P World Index includes companies from 24 developed markets, which means it excludes emerging markets. The index takes the largest and mid-sized companies in each country until they reach about 85% of that country's available market value.
Smaller companies are left out, so it is not a small-cap measure. It holds well over a thousand companies, a figure that can change as the index is reviewed.
Because the index is built on market value, the biggest economies carry the most weight. The United States is a large share of the index, and the rest comes from places such as Japan, the United Kingdom, Canada and continental Europe.
That means a fund tracking the index is heavily influenced by the US market. For a finance professional the index has several uses.
It is a benchmark for global funds, it can serve as a reference for the performance of a company's international pension holdings, and it is the basis for funds that offer one-step diversification across many countries. Currency matters too.
Index returns can be shown in a single currency such as US dollars, so a UK investor sees both the movements of the underlying shares and changes in exchange rates. Investors should check which version of the index a fund uses.
The index is a starting point for many investors who want one holding for global developed markets. Using it saves the time of choosing country by country, and its rules for selection and rebalancing are public, so the make-up of the index is transparent.
Investors who want emerging markets must add a separate holding.
In practice
Real-world examples.
Example
A fund manager running a global equity fund compares her 8% return with the S&P World Index return of 9%. She tells investors that her stock choices cost the fund 1 percentage point.
Example
An individual investor buys an exchange-traded fund that follows the index to spread $25,000 across many developed countries. He avoids having to pick individual markets, and he pays a single low annual fee instead of building a portfolio of country funds.
Example
A corporate treasurer reviews the company's overseas pension investments. She uses the index to check whether the fund managers have beaten a simple global benchmark. The comparison shows whether the fees paid to active managers have been worth it.
Formula
Calculation
Index return = Sum of (Country weight x Country return).
Suppose a simplified world index has three markets: the United States with a 70% weight, Japan with 20% and the United Kingdom with 10%. If the US returns 10%, Japan returns 5% and the UK returns 2%, the index return is (0.70 x 10%) + (0.20 x 5%) + (0.10 x 2%) = 7.0% + 1.0% + 0.2% = 8.2%. The weights themselves move with market prices, so a country whose shares rise faster than others gradually becomes a larger share of the index without anyone placing a trade.Case study
Seen in the real world.
Birchfield Foundation is an entirely fictional charity that holds $10,000,000 mostly in local company shares. In this illustrative story, the trustees realise that one country's economy affects both the charity's donors and its investments.
They decide to move half the portfolio into a fund tracking a global developed-market index like the S&P World Index. The change spreads the risk across many countries, currencies and industries.
In the first year, the home market falls while the global index rises, which cushions the charity's results. The illustrative lesson is that global diversification can protect against a problem in one country, though it cannot protect against a global downturn. The finance committee also recorded that the move should be judged over at least five years, because currencies and market leadership change from year to year. The trustees also noted that the lower-cost fund charged an annual fee of 0.2%, which is $10,000 on a $5,000,000 holding, far less than they had been paying for local stock picking.
Watch out
Common mistakes.
- Assuming a world index includes emerging markets, when this one covers developed markets only.
- Believing a global index is evenly spread across countries, when the largest economies dominate.
- Ignoring currency effects when comparing returns in different currencies.
Questions
People also ask.
How many countries does it cover?
It covers 24 developed markets.
Does it include small companies?
No, it covers large and mid-sized companies that make up about 85% of each country's available market value, so small-cap exposure must come from another holding.
How can I invest in it?
You can buy funds and exchange-traded funds that aim to track the index, but you cannot buy the index itself.
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