International exposure would be patchyThe near-even split of sales at home and abroad for S&P 500 Index companies is an average. When sales are broken down by sector, the picture looks much different.
Information technology has the most international exposure: IT companies based in the United States earned almost 60% of their 2014 sales in other countries. That shouldn’t come as a surprise; global demand is strong for the products and services of big technology names such as Apple, Microsoft, Google, and Facebook. Even in this sector, though, investors holding only U.S. companies would miss out on the potential diversification benefit of owning foreign stocks—both those with a global reach, such as South Korea’s Samsung, and more domestically focused businesses, such as Chinese e-commerce giant Alibaba.
In contrast, utilities and telecommunication services, which tend to operate regionally or nationally, were among the sectors that generated the least sales overseas. Investors holding only large-cap U.S. companies would have little international exposure to these industries, which together accounted for nearly 9% of stock market capitalization outside the United States as of the end of October 2015.
Domestic allocations would be unevenNot only would a portfolio that exclusively holds large-cap U.S. stocks lack international diversification, but its domestic sector allocations would be out of step as well.
The figure on this page shows how the sector weightings in the S&P 500 Index don’t track with those of the global stock market (which includes U.S. companies). Some of the differences aren’t very large. But compared with a broadly diversified international portfolio, one based on the S&P 500 Index would have significantly more exposure to IT and health care stocks and considerably less to materials and financials.
The past doesn’t show what lies aheadU.S. stocks have outperformed international stocks in recent years with help from the IT and health care sectors. But performance leadership can be quick to change, and that’s one reason why diversification is important. Large-cap U.S. stocks can give you a degree of exposure to international economic and market forces, but not to the same extent as a portfolio of both U.S. and non-U.S. stocks.
*All S&P 500 Index and sector revenue data are from S&P Dow Jones Indices LLC for 2014.
All investing is subject to risk, including the possible loss of the money you invest. There are additional risks when investing outside the United States, including the possibility that returns will be hurt by a decline in the value of foreign currencies or by unfavorable developments in a particular country or region.
Diversification does not ensure a profit or protect against a loss.