More return? My ETF strategy vs. 70/30 world portfolio

Unlike so many investors, I don’t invest in a conventional global portfolio with a 70/30 weighting. No, my strategy is more offensive and places greater emphasis on China and the emerging markets than on the USA. You can find out whether I have been successful with this ETF strategy in recent years in today’s article.

Less USA, more return?

I’ll come straight to the point: my returns in recent years with a 50/50 ETF strategy have not been significantly better than under the classic 70/30 ETF strategy. But of course, as an investor I don’t always want to follow a predetermined plan, I also want to implement my own strategies.

In the 70/30 World strategy, 70 % is invested in the MSCI World, which covers 23 industrialised countries, and 30 % in the MSCI Emerging Markets, which covers 25 emerging markets. This strategy covers around 85% of global market capitalisation, which is a good reason for many investors to pursue this 70/30 approach.

The fact is that passionate investors also like to add a bit of flavour to their portfolio. This is why many decide to incorporate their own investment preferences alongside the global portfolio. As a result, individual stocks such as Amazon, Apple or Shell are often added.

However, my strategy is different. I am focussing on China. This is because I have already been to China twice myself – once for a holiday and once to study. From my experience there, I am convinced that overweighting the USA and underweighting China is the wrong investment strategy in the long term! For this reason, I deliberately invest with a 50/50 ETF strategy.

Why more China and less USA?

What is the reason why I am so convinced of China’s recovery and therefore prefer to invest more rather than less in emerging markets?

China has already left the USA behind in several technological areas and I am sure that this trend will only intensify in the future. The technological strength is further emphasised by Chinese companies such as Tencent, dji and Huawei, all of which have been pioneers in 5G research.

But China’s technological omnipresence is also becoming noticeable alongside these technology giants. In 2018, I was already able to pay for my meal at my local McDonald’s using a face scan, while at the same time hardly anyone in Europe and the USA had made use of common technologies such as Apple Pay.

Yes, I was even able to transfer money to the homeless in China using a QR code! That is definitely not yet conceivable in Germany.

Is the USA overweighted in the global portfolio?

If you are currently investing under the classic 70/30 ETF strategy (MSCI World + MSCI Emerging Markets), you should know that almost 69% of your MSCI World ETF is now invested in the USA.

The USA therefore clearly makes up the largest part of the MSCI World, but also of your portfolio. With this 70/30 strategy, 48.13% of your total assets would be invested in the USA. This means that for every euro you invest in this world portfolio strategy, 48 cents will flow into the USA and only 52% into the rest of the world.

In my opinion, we are not talking about a ‘global strategy’ here, but rather a ‘US strategy’. Nevertheless, the USA is the global player with the world’s largest market capitalisation. This is what makes the 70/30 ETF strategy so popular.

Market capitalisation is also known as ‘stock market value’ and is calculated from the current share price and the number of shares in a listed company. It can therefore change constantly. If a company has more shares of greater value, the proportion of this company in the portfolio is correspondingly larger.

Facebook is a company with an enormous market capitalisation. After the tech giant announced its renaming to ‘Meta’, the share fell by a full 26%, causing a record loss of 232 billion US dollars. That is as much as the combined market value of Mercedes-Benz, BMW and Deutsche Post.

No wonder, then, that Germany only accounts for 2.4 % of the MSCI World.

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With 70/30 to success

Even if the 70/30 ETF strategy overweights certain countries, it has proven to be extremely successful in recent years. Investors who have invested 70/30 over the last 10 years have realised an annual return of 9.3 %, which is higher than the average return of 6 to 8 %.

An investor who invested €10,000 10 years ago was able to increase his portfolio to €22,400 using the 70/30 strategy.

If an investor had invested the same € 10,000 with the 50/50 strategy, i.e. 50% MSCI World and 50% MSCI Emerging Markets, he would have had only € 19,500 in his portfolio at the end of the 10 years. This corresponds to a return of 7.65 %.

Why I don’t invest 70/30

Over the past 10 years, investors have been more successful when they have overweighted the USA. But like so many things in the financial world, the ETF market cannot be predicted. I still believe that I will be more successful in the long term with a 50/50 ETF strategy. But why am I so convinced?

Let’s take a look at the following chart:

Here you can see the 7-year performance of the iShares Core MSCI Emerging Markets. Although the performance is positive, it does not look particularly exciting. If we now look at a larger section of the development, the picture immediately looks different, as the chart below from Franklin Templeton Investments demonstrates.

This chart shows that the emerging markets have performed significantly better than the developed markets since the start of the measurement. For this reason, the period under review plays a key role in questions such as ‘which performs better, emerging markets or developed markets?

Reasons for poorer performance in the emerging markets

According to some academics, the temporary poorer performance and therefore lower returns of emerging markets are often due to the political uncertainty of these markets. And this is currently also the case.

China is currently suffering from massive economic intervention by the government. For this reason, many Chinese companies are considered less valuable than American companies, as they can be heavily influenced or even banned by the government at any time. China currently accounts for 32% of the MSCI Emerging Markets.

Excursus: When are shares expensive and when are they cheap?

The price/earnings ratio (P/E ratio) is one of the most important key figures for investors. It can be used to determine how expensive a share or an entire ETF is compared to the previous year’s profit. The P/E ratio describes how often last year’s profit must be realised in order to reach the current valuation.

The P/E ratio on the Shanghai Stock Exchange is in the mid-range with a value of 16.9 in February 2022.

By comparison, the P/E ratio of the US S&P 500 is 25.5 at the same time, which is significantly higher or more expensive.

Investors who are now buying American stocks are paying significantly more than Chinese stocks to get the same dividends. And that is one of the reasons why I will continue my current 50/50 ETF strategy.

This decade will be Chinese!

Whether we like it or not, I am convinced that the future lies in China. For this reason, I am already taking the risk and investing more in the emerging markets and therefore China.

At the same time, I believe that the USA will not be able to maintain its overperformance of recent years. Because while more Chinese are moving into the middle and upper classes, consuming significantly more and creating innovations, the American population is only growing slowly, is getting older and is not getting richer.

Of course, there are also arguments against increased investment in China and in favour of continued higher investment in the US. One of these would be the US companies that could also expand their business in a growing Chinese market, such as Apple or Nike.

However, it should not be forgotten that such companies have had to share their knowledge with local Chinese partners in recent years (e.g. via joint ventures). As a result, knowledge is being transferred from American to Chinese hands, enabling them to catch up with the Western knowledge advantage more quickly and thus become more independent.

Projects such as the new Silk Road and high-speed trains are also expected to boost China’s trade with the rest of the world immensely in the coming decades. These are just some of China’s strategic measures aimed at becoming the industrialised country of the future.

98/100

Points

1,300 ETFs suitable for savings plans

controlled by BaFin

2.6% interest for new customers

TO THE PROVIDER*

Conclusion: Emerging markets remain the focus of my ETF strategy

The emerging markets have experienced strong economic growth in recent decades and are likely to continue to do so in the future. China in particular will prove itself as an economic power and will soon take over from the USA. Investors should therefore keep a close eye on developments in the emerging markets to avoid missing out on valuable opportunities.