Global Diversification Still Requires International Securities

June 03, 2024

Investors often ask if globally diversified stock portfolios are necessary when the US stock market has many multinational companies or those earning revenues from non-US countries. The data suggest these companies are no more successful at global diversification than a faux mane is at turning a golden retriever into a lion.

We can test the global diversification benefit of companies with non-US revenues by looking at their average returns in months when US stock returns and international returns diverge. Stocks offering sufficient non-US exposure should presumably move more in line with the international market. However, companies with non-US revenue appear to merely track the broader US market on average. In particular, when the US market is down—and investors would hope for global diversification to kick in—companies with non-US revenues are similarly down. These results echo academic evidence showing that stock prices tend to move based on where they trade more than where the business resides.1

Developed ex US and emerging markets stocks combine for about 39% of the global stock market.2 That’s a meaningful chunk of the equity investment opportunity set, and based on these results, they offer a potentially pivotal role complementing the performance of the US market.

Past performance is not a guarantee of future results. Actual returns may be lower.
Source: Dimensional, using CRSP and Compustat data. The eligible universe includes ordinary common US stocks of all capitalizations traded on NYSE, NASDAQ, and NYSE MKT. We identify a company with and without foreign sales exposure using Compustat's annual geographic segment data. Value-weighted portfolios are formed on eligible stocks with and without foreign sales. Portfolios are rebalanced annually in January based on the annual geographic segment data. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2024, all rights reserved.