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Should you add international equities to your investment portfolio?
Given the S&P’s track record of impressive long-term results, is it necessary to diversify beyond U.S. equities?
The S&P 500 Index tracks the stock performance of 500 large companies in the U.S. As one of the most popular indexes in the world, CNBC reports more than $11 trillion is benchmarked to the S&P 500, and for good reason, as it has a solid history of outperforming many actively managed funds. In a new study published earlier this year, it was found that 79% of fund managers underperformed relative to the S&P 500 in 2021. And over the last 10 years? That number jumps to an astounding 86%. So, given the S&P’s track record of impressive long-term results, is it really necessary to diversify beyond U.S. equities?
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The case for the S&P 500
The performance of the S&P 500 speaks for itself. Since its inception, the index has produced an annualized return of 11.88% (from 1957 to 2021) and counts leading blue-chip companies such as Apple, Microsoft, Amazon, and Tesla among its constituents. Consequently, for investors seeking access to the growth potential of many of America’s biggest names, investing in a fund that tracks the S&P 500 could make a lot of sense.
The case for international equities
But let’s not forget that one of the tenets of modern portfolio theory is diversification. Simply put, investors can avoid concentrated portfolio risk by investing in a broader range of asset classes, sectors and, of course, geographies. And in today’s environment where we are rapidly learning to expect the unexpected if a black swan event should affect the American market, then although an investor’s portfolio would still be adversely affected (given the structure of the global economy and how interconnected everything is) the degree of volatility is likely to be significantly less relative to a portfolio consisting entirely of U.S. equities.
This article provides a nice primer on investing in international equities. And for investors wishing to gain exposure to the S&P 500 or leading market benchmarks across the globe, the following ETFs could be of interest. Alternatively, ETF Central’s screener offers a great way to compare and select the right funds for your personal circumstances.
SPY - (SPDR S&P 500 ETF)
- AUM: 367.4 B
- Expense Ratio: 0.095%
- YTD Performance: -17.7%
- 3-Year Performance: +33.3%
VT - (Vanguard Total World Stock ETF)
- AUM: 22.5 B
- Expense Ratio: 0.07%
- YTD Performance: -20.9%
- 3-Year Performance: +15.2%
SCHF - (Schwab International Equity ETF)
- AUM: 25.8 B
- Total Expense Ratio: 0.06%
- YTD Performance: -22.8%
- 3-Year Performance: -1.1%
VEA - (Vanguard FTSE Developed Markets ETF)
- AUM: 90.1 B
- Total Expense Ratio: 0.05%
- YTD Performance: -23.4%
- 3-Year Performance: -1.5%
Data as of October 31, 2022.
Please note this article is for information purposes only and does not constitute investment advice.
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