Passive investing has become a popular component of modern portfolio construction, offering cost-effective, diversified exposure to an array of markets. Yet beneath the surface of this seemingly efficient strategy lies a structural flaw: passive global and international index exchange-traded funds (ETFs) often underrepresent key regions and countries while omitting others.
“This approach — driven by gaps between stock index methodologies and economic realities — may result in missed opportunities and suboptimal portfolio outcomes,” says senior product specialist Warner Wen, who focuses on ETFs.
According to Wen, the heart of the issue is the way passive funds are constructed. Most global and international index funds track benchmarks such as the MSCI All Country World Index (ACWI), MSCI Europe, Asia and Far East (EAFE) index and FTSE Global All Cap Index.
“Each index has its own nuances, but some of these widely followed indices can severely limit exposure to certain markets,” he says.
Take the MSCI ACWI’s weightings of the U.K., France and Italy, for example. As shown in the table, the U.K.’s weight is pegged at 3.2% despite it being the world’s sixth-largest economy by gross domestic product. France, the eurozone’s second-largest economy, stands at 2.3% while Italy, the third-largest economy is 0.7%. Perhaps most noteworthy regarding these exposures are the results of their stock markets — all notched 20%-plus results or more (in U.S. dollar terms) year-to-date through October 31, 2025.
Index-prescribed country weights could also limit exposures to areas of opportunities. Taiwan, a hub of innovation with direct links to the artificial intelligence build-out, has a 2.2% weight in the MSCI ACWI, while Canada’s weight of 2.9% appears low amid the surge in materials demand, particularly gold.
Blind spots
MSCI ACWI (CAD) regional and country weights
as of October 31, 2025
Sources: Capital Group, MSCI.
When it comes to international index exposures, it stands to reason that the widely followed MSCI EAFE index omits Canada and the U.S., but the index also avoids China and emerging markets entirely. Investors relying solely on passive funds that track such an index may find themselves with minimal exposure to some of the world’s most dynamic economies.
“This exclusion can lead to significant underrepresentation in passive portfolios, which current and future investors should be aware of before they invest,” says Wen.
He contrasts passive with actively managed global and international ETFs which in general are able to determine allocations based on individual company research, investment environments and outlooks rather than rigid index methodologies.
"Fundamental active global and international ETFs' regional, sector and country allocations are driven by bottom-up company research and intentional tilting versus a benchmark index," he says.
On the other hand, the rules-based rigidity of index methodologies and their infrequent rebalance and reconstitution schedules limit their ability to respond to shifts in macroeconomic, industry, or company specific environments. Investors may be forced into worse investments because of strict rules, even when better opportunities exist.
This inflexibility is particularly problematic in emerging markets, where rapid changes in policy, demographics and innovation can create investment opportunities. Another consideration is that global and international funds are typically considered “core”
holdings — the foundations of a well-balanced portfolio. Relying on passive strategies alone for this core can create blind spots and concentration risks while missing potential investment opportunities.
“Active management provides both diversification and flexibility at the core of a portfolio to capture growth across the full spectrum of global and international possibilities,” says Wen.
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