Many U.S. investors have stuck to what they know – the U.S. markets. However, as more are adding international exchange traded funds, investors should get a sense of how much is needed for a diversified global portfolio.
“Many investment managers no longer view the U.S. stock market as a separate asset class from the rest of the world’s stock markets,” Rick Kahler, president of Kahler Financial Group, on Morningstar. “Today, they regard it as one component of a global asset class of stocks.”
Diversification is the main reason investors should include international exposure. Kahler explains that for the same reason one wouldn’t hold just one stock in an investment portfolio, one should not focus entirely on the U.S. either.
“It’s as important to diversify among countries as among companies,” Kahler added.
While investors have shown a greater demand for foreign equities, there is still a home bias among many investment portfolios. According to the Investment Company Institute, in 2014, a quarter of new cash put into American mutual funds went to overseas-oriented mutual funds, compared to 15% in 2004.
However, the U.S. market makes up about 50% of the global market capitalization. Consequently, investors who want to follow a true globally diversified investment theme would only hold about half their portfolio in U.S. equities and the rest in international holdings.
Additionally, looking at other country market capitalization, developed markets, which include those in Europe, Australia Pacific and Japan, account for 40% of the total global market-cap. The remaining 10% account for the emerging markets, Southwest Asia and Latin America.
“Weighting your portfolio accordingly gives you a well-diversified stock portfolio that has a high probability of withstanding the inevitable rise and fall of equity markets,” Kahler said.
While ETF investors have a number of region- and country-specific funds to choose from, there are also some all-in-one ETF options as well.
For instance, the iShares MSCI ACWI ETF (NasdaqGS: ACWI) tries to reflect the performance of the MSCI ACWI Index, which includes North America 54.8%, Latin America 1.3%, Greater Europe 24.9% and Asia 19.0%. Developed market exposure is 93.2% and emerging markets is 6.8%.
Additionally, the Vanguard Total World Stock ETF (NYSEArca: VT), which follows the FTSE Global All Cap Index, includes 55.0% North America exposure, along with 1.4% Latin America, 24.3% Europe, 19.2% to the Asia Pacific. VT includes 93.2% developed market and 6.9% emerging markets. [A Gauge for Foreign ETF Exposure]
Investors may also notice the various appellations in differing fund products. ETFs described as “international” will usually include markets outside the U.S. while “global” or “world” funds will track everything.
For more information on the global markets, visit our global ETFs category.
Max Chen contributed to this article.