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 revenues 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 have potential to be a pivotal complement to the US market.

Exhibit 1

One of These Things Is Not Like the Other
Average monthly returns when US and developed ex US stock returns have opposite signs, January 1979–December 2022

Past performance is not a guarantee of future results.

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.

This article originally appeared June 6, 2024 in Above the Fray, a weekly newsletter for Dimensional clients.  It is republished here with permission of Dimensional Fund Advisors LP. No further republication or redistribution is permitted without the consent of Dimensional Fund Advisors LP. 

1. Kenneth A. Froot and Emil Dabora, "How Are Stock Prices Affected by the Location of Trade?" (working paper, National Bureau of Economic Research, May 1998).

2. As of December 31, 2023

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