By Randy Farina, Senior Portfolio Manager
Many international indices have significantly lagged behind their U.S. counterparts in recent years. From 2009-2019, the S&P 500 Index gained 256% while the MSCI EAFE Index only returned around 81% for the decade.1 The coronavirus pandemic has led to further underperformance for international markets as U.S. large-cap indices have been able to lean on their strong balance sheets since the outbreak began.2
With this in mind, investors could be left wondering if international stocks are still worth exploring and implementing in their portfolios. Below, we examine four key benefits of international investing.
- More choices. About 42% of the world’s market capitalization lies outside the U.S.3, but U.S. investors’ portfolios tend to skew around 90% domestic.4 As such, investors could be missing out on a myriad of foreign stocks and potential returns. For example, China’s Tencent is the world’s largest video game publisher and is up 58% this year, seeing revenue growth of 29%.5
- Value exposure. While U.S. markets tend to favor quality and growth-oriented sectors like tech, international benchmarks can offer investors more exposure to value-based areas like energy, materials and financials. There’s no doubt U.S. tech names have enjoyed strong gains this year6, but owning international equities helps safeguard a portfolio against a potential market rotation.
- Diversification. A major goal of investing is to have allocations among asset classes that are not 100% correlated. Because non-domestic markets do not directly coincide with U.S. markets, investing internationally offers a unique way to diversify a portfolio. Internationally-focused investors, for instance, reaped the benefits of this in 2000-2010 when overseas markets outperformed the U.S. by 27%7 cumulatively following the dotcom bubble.
- Currency. Finally, investors should consider international investing to hedge against a potentially weak U.S. dollar. If we were to see a sustained weakness in the dollar against global currencies, international stocks would be worth more once converted into U.S. currency.
Though U.S. investors focused on domestic stocks have fared well over the last decade, it’s important to be cognizant of home country bias when investing. We generally recommend around a 20-30% allocation to international investments due to the aforementioned reasons.
As we enter the new year, we’ll be closely watching non-domestic markets and will continue to seek out quality, attractively valued international names. If you have any questions, please contact me at email@example.com.
- Bloomberg (data between 12/31/09-12/31/19) – SPX Index in comparison to MXEA Index
- MarketWatch (7/15/20) – Why the S&P 500 isn’t being punished despite U.S. inability to contain COVID-19
- Bloomberg (data as of 12/14/20) – Exchange market cap USD (Millions)
- The Balance (1/18/20) – How to build a diversified global portfolio
- Yahoo! Finance (data as of 12/10/20) – TCHEY
- FoxBusiness.com (11/30/20) – Dow books best month since 1987
- Bloomberg (data between 12/31/99-12/31/09) – SPX Index in comparison to MXEA Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries.
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