Investors largely target markets they know, and for U.S. investors, most focus on domestic stocks. However, you may be missing out by avoiding international stocks and exchange traded funds.
“Looking beyond our borders to international equities can have benefits for U.S.-based investors,” according to a Deutsche Asset Management white paper.
By excluding international exposure, investors may lose out on access to almost half of the global equity opportunity set, along with the potential diversification benefits to a U.S.-centric investment portfolio.
To get a sense of how a truly diversified international investment portfolio works, investors can take a look at the MSCI All Country World Index, which includes a split of around 53% U.S. exposure, 10% to emerging markets and the remainder to ex-U.S. developed market equities.
“We found that, for equities, a mix somewhere in line with global market capitalization is a pretty strong starting point – that’s around 50% in the U.S., about 40% in international developed markets, and around 10% in emerging markets,” Robert Bush, ETF Strategist for Deutsche Asset Management, said in a note. “As an investor shifts from having 100% invested in the U.S., adding international equities starts to lower volatility.”
While some may argue that they have enough international exposure through U.S.-based multinationals with large global revenue streams, the economic exposure of U.S. companies and international companies still vary and provide drastically different performances.
Moreover, international exposure helps prevent investors from becoming overweight in certain market sectors. For instance, the U.S. is concentrated in technology and health care sectors while other developed markets may have larger tilts toward financials, consumer staples and industrials.
“In our opinion, the most compelling argument for international investment is the advantage of diversification,” according to Deutsche Asset Management.
Due to the varying economic and sector exposures of international equities, many foreign stock markets have historically exhibited relatively low correlation to U.S. equities, with Japanese and Australian markets reflecting the lowest correlation to U.S. stocks.