The U.S. makes up about half of the world economy, so investors would only need about a 50% position in U.S. stocks. For instance, the Vanguard Total World Stock ETF (NYSEArca: VT), which follows the FTSE Global All Cap Index, includes 54.1% North America exposure, along with 22.1% Europe, 14.2% to the Asia Pacific, 9.4% emerging markets and 0.2% to the Middle East.
Still, most asset-allocation experts advise a middle ground. Benz points to target-date mutual funds as an example, with many investment shops allocating about two thirds of their allocations to U.S. equities and the rest in foreign positions, ranging anywhere from 20% foreign equity to 40%.
“The rationale behind those varying exposures gets back to volatility,” Benz said. “As investors get closer to needing their money in retirement, they shouldn’t just segue to a more conservative stock/bond mix; their intra-asset-class exposures should also change to emphasize more conservative investment types. Because foreign stocks typically entail some currency risk as gains or losses are translated from foreign currencies to dollars, Morningstar research has concluded that foreign weightings should decline accordingly.”
For more information on investing with ETFs, visit our ETF 101 category.
Max Chen contributed to this article.