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A Fresh Look at U.S. vs. International Equity


Given the recent outperformance for U.S. stocks vs. International stocks over the last decade, RWM’s Portfolio Management Committee (PMC) recently met to discuss the appropriate allocation to U.S. and International stocks.1

Our purpose was to see if a change in the split between the two regions was warranted.  For context, the PMC last reviewed this subject in detail in 2012 right after International developed stocks had come off a strong decade of outperformance over U.S. equities (2000-2009).

Fast forward to 2020, and the tables have turned, U.S. stocks have been outpacing International stocks on average by per year from 2010-2019 and into 2020.2  We thought it was prudent to revisit whether our asset allocation strategy still holds today.  We looked at the same data points as before, (correlations, returns and standard deviations) and reviewed them through July 2020.  What we found when looking at U.S. vs. International stocks is:

  1. Correlations between U.S. stocks and International stocks have increased to .88 since 2000.
  2. Adding International stocks to a U.S. only portfolio has lowered portfolio volatility but also resulted in slightly lower returns since 1970 when compared to a U.S. only stock portfolio.
  3. Volatility has been greater with International stocks as they have had a standard deviation of 17.0% compared to the U.S. at 15.2% since 1970.
  4. Investing in International stock is more expensive than investing in U.S. stocks.  The average expense ratio for International stock index funds is 0.20% compared to 0.09% in the U.S.

Within International stocks, we also reviewed emerging markets vs. developed markets.  What we found is:

  1. Since 2000, the correlation between U.S. and emerging market stocks has declined from 0.82 in 2012 to 0.79 in 2020.
  2. Returns have been better in emerging markets compared to developed markets with emerging markets up 10.4% and developed stocks gaining 5.4% since 1988.
  3. Volatility has been greater in emerging markets than in developed markets with standard deviations of 22.5% and 16.6%, respectively.
  4. Adding emerging markets to a developed markets only portfolio improved performance while adding only slightly to volatility.

 The Outcome

While it has been a difficult run for International stocks over the last 10 plus years, the PMC still believes an allocation to International stocks is warranted.  It significantly broadens the investable universe, provides investors with exposure to other countries that are in different stages of the business cycle with different monetary and fiscal policies, and similar runs of poor performance from both US and foreign stocks have occurred in the past.  While the additional eight years’ worth of data since 2012 has made foreign stock , their addition to an equity allocation still reduces the overall level of volatility and In addition, we’ve seen both U.S. and International stocks have long runs outperforming each other, meaning that it’s likely there will be another extended period of time in the future when International stocks well outpace U.S. stocks.


1US Stocks represented by the S&P 500. International Stocks represented by the MSCI ACWI Ex USA Index.
2Looking at the S&P 500 vs. MSCI ACWI Ex USA from 2010-2019