Swedroe: Dispersion Shows Diversification Matters

January 06, 2017

Earlier this week, I examined a recent study that offered investors powerful evidence regarding a reduction, though not the elimination, of geographic diversification benefits in a flattening world. To more fully understand the integration of global equity markets, I then explored the correlation of returns between international and domestic stocks. Today I’ll resume my analysis with a look at the dispersion of returns among foreign and U.S. equities.

Dispersion Of Returns

In 2009, we saw very wide dispersion of returns. For example, while the S&P 500 was up almost 27%, the MSCI Emerging Markets Index rose 79%. And emerging market small and value stocks produced even higher returns. In addition, international large value and small value stocks, as well as international REITs, outperformed their domestic counterparts by wide margins.

Note the correlations were positive, as all equity asset classes produced above-average returns. However, the world didn’t look very flat in 2009.

In 2010, even though the S&P 500 returned about 15%, emerging markets stocks outperformed it by about 4 percentage points. On the other hand, U.S. large, large value, small, small value and REIT funds outperformed their foreign counterparts by significant margins.

In 2011, while the S&P 500 returned just greater than 2%, in general, international stocks provided negative returns. The MSCI Emerging Markets Index lost more than 18%.

In 2012, the relative performance of U.S. and international funds reversed; international funds outperformed their U.S. counterparts in all asset classes, although the return differences were relatively small.

In 2013, U.S. stocks outperformed international equities by wide a margin. For example, the S&P 500 Index, which returned 32.4%, outperformed the MSCI EAFE Index by about 10 percentage points and the MSCI Emerging Markets Index by approximately 35 percentage points. The world didn’t look very flat in 2013, either.

In 2014, domestic stocks generally not only far outperformed international stocks, but U.S. stocks rose and developed, non-U.S. markets generally fell. Again, the world didn’t look flat.


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