The S&P/ASX 200 Index (ASX: XJO) closed at post-GFC highs this week as a strong rally in each of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and BHP Billiton Limited (ASX: BHP) led Australian stocks higher.
The local share market was driven higher by renewed investor optimism on U.S. economic growth prospects, higher crude oil prices and forecasts for stronger corporate earnings. Whilst the local bourse has been the clear regional out-performer for the week, investors must remember that sticking to one market in isolation bears its own risks.
Diversification
Although stocks like Australia and New Zealand Banking Group (ASX: ANZ) and Wesfarmers Ltd (ASX: WES) tested multi-year highs this week, investors focusing solely on Australian stocks have missed out on the record-high setting rallies of global leaders Apple Inc, Alphabet Inc (Google) and Tesla Inc.
A simple way to obtain this diversification by Australian investors is the Vanguard MSCI International Index ETF (ASX: VGS) ("MSCI ETF").
Benefits of ETFs
Exchange traded funds, or ETFs, have grown in popularity over the years as droves of SMSF investors seeks the benefits of diversification and access to investments afforded by ETFs.
Of course, year-on-year, an ETF isn't going to provide the same returns as traditional stock picking by fund managers like Perpetual Limited (ASX: PPT) and Magellan Financial Group Ltd (ASX: MFG) given the ETF tracks a basket of stocks as opposed individual ones.
However, as Warren Buffet has shown with his million dollar bet against a U.S. hedge fund, an investment in the underlying index of a particular sector should outperform the long-term performance of individual stock selection. Therefore, buying ETFs is the tried and tested way to beat individual stock selection (over time).
The MSCI ETF
As alluded to earlier, any investment should not be tied to one particular company, industry or geography. With investors generally possessing a "home bias" and having comfort in sticking to what they know, it can be easy for most investors' portfolio's to go astray from proper international diversification.
The MSCI ETF provides a simple and easy way to fix this.
With the MSCI ETF replicating the MSCI World (ex-Australia) Index, buying this ETF gives Australian investors easy investment into the world's biggest and best companies.
In fact, as at 28 February 2017, the MSCI ETF counted the likes of Apple, Alphabet, Amazon Inc, Exxon Mobil Corp and Facebook Inc as part of its top 10 largest investments. Even more impressive is that this ETF extends its holdings to Asia and Europe, owning notable positions in the likes of Nestle SA, Novartis AG and Toyota Motor Corp.
Accordingly, the MSCI ETF managed to deliver an annualised 12.41% return for the year, after accounting for management costs of 0.18% per annum.
Foolish takeaway
The very nature of index trackers means that the price of an ETF will be high if the underlying shares it owns are trading all-time highs. The MSCI ETF is no exception to this.
Based on Thursday's close of $59.83, the MSCI ETF is a whisker away from its all-time high posted early last year, making some believe it's too expensive to buy at current prices. Nevertheless, its share price is not reason enough to stay away from the MSCI ETF today (in my opinion).
Instead, investors must take a view on the global economy and determine whether stocks are due for a pullback or whether they can continue their bull-run higher into 2018.
If they believe it is the latter, than the MSCI ETF is a sure fire stock to buy to ride that boom.
