S&P 500 vs. International Stock Funds: Revenue Breakdown By World Region

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One of the common reasons given for only investing the S&P 500 or only US-based companies is that the businesses operate globally. “McDonald’s and Coca-Cola sell burgers and soda everywhere. Disney is everywhere. ExxonMobil sells energy around the world.” I understand the sentiment, but how about some real numbers? The Morningstar article Investing Close to Home Is Overrated breaks down the revenue by region for some popular ETFs that track broad US and International stock indexes.

A few quick takeaways:

  • Companies in the S&P 500 or Total US index get about 65% of their revenue from the United States and 35% from the rest of the world.
  • Companies in a Total World ex-US index only get about 15% of their revenue from the United States and 85% from the rest of the world.

The S&P 500 does derive a decent chunk of its profits from international sources. However, you’re still missing a lot of exposure from the rest of the world.

Now, I happen to agree that you don’t “need” to own an international index fund. The Dow Jones index has taught us that even a poorly-constructed funky index that tracks 30 human-picked companies based on the numerical price of a single share (not total market value) can work out over the long run. By extension, if you only own the S&P 500 and hold on for 30 years, you’ll probably turn out fine as well.

However, I still choose to add international stocks to my portfolio. Why? The holding on part. I expect international stocks again outperform US stocks for years in a row. From a previous post US vs. International Stocks: Historical Cycles of Outperformance:

us_intl_cycle

Nobody knows the future, and so there is no single “right” answer. From No Consensus on International Stocks: Make Any Decision, Just Stick With It:

international3

Bottom line. Owning just US stocks might work out just fine, but it’s still not the same as owning international stocks. The world will change in many unexpected ways during next 50 years and my investing life is easier when I own the entire haystack.

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Comments

  1. Jonathan…I just took a position in VEA, Vanguard FTSE Developed Markets ETF. As you pointed out the valuations are much more compelling internationally and the yield was 3.2% from a strong, diversified portfolio of foreign companies including Canada.
    I was wondering if had any feeling about whether ETFs are really equivalent to Mutual Funds as an international investment vehicle and how much of a benefit is dollar hedging to have built into the ETF when you are dealing with Euro, Yen and Sterling primarily?

    • Well, at least for Vanguard the ETF and mutual funds are share classes of the same pool of investments.

      I don’t believe the Vanguard international stock index funds are dollar-hedged (or most of the popular competitors) and I’m okay with that. That would add a layer of expense and I think it will all work out over the long run without hedging.

  2. The fact that US was once a developing market is the reason I keep investing in a global portfolio. And of course Japan. The recent decade long US out performance has certainly tested the global portfolio believers.

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