Domestic ETFs That Give Foreign Exposure

September 17, 2014

It’s easy to forget—and important to remember—that half the revenues of companies in the S&P 500 come from outside the U.S.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Deborah Frame, vice president of investments at Toronto-based Cougar Global Investments.

Much attention has been paid to the announcement that Canadian donut chain Tim Hortons agreed to be bought by the company that owns Burger King in a deal that could create the world’s third-largest fast-food company.

Burger King has said the acquisition was designed to expand sales, but much of the coverage suggests Burger King’s primary objective is to gain a tax advantage by shifting headquarters of the merged entity to Canada, where the corporate tax rate is 26 percent compared with 35 percent in the U.S.

Wherever the new company ends up being based, this proposed transaction reminds us that you don’t have to take money out of your U.S. stock index funds to get more international exposure. With investment markets becoming increasingly globalized, it’s important that big and popular funds like the SPDR S&P 500 ETF (SPY | A-98) have a truly international flavor.

Although foreign-based firms were deleted from the S&P 500 Index in 2002, this did not render the index a pure U.S. play. Today U.S. companies conduct almost as much business overseas as they do in the U.S. Close to 50 percent of production, sales and profits are from overseas business, and the amount paid in foreign taxes has been more than the amount paid in U.S. taxes in some recent years.

And it’s not just SPY that has an international flavor. The SPDR MidCap 400 ETF (MDY | A-79) does as well, and so does the iShares Core S&P Small-Cap ETF (IJR | A-91). At Cougar Global, we favor the S&P indexes and the funds built around them because we judge them to be the most viable way to achieve our asset allocation objectives.

Taking Measure Of Foreign Sales

The Financial Accounting Standards Board requires companies to disclose any geographic segment contributing 10 percent or more of revenues. The end result is that almost half of the S&P 500 issues are not required to report full information on the geographic segments contributing to their revenues, meaning they don’t have to provide a full picture of their global sales.

Although the U.S. is still the world’s largest single-country market, in recent times it has been a slow-growth market compared with much of the rest of the world.

Globalization has been an enormous boon for some of the biggest names in corporate America, and multinationals have increasingly followed global growth.

Foreign exposure allows U.S.-based companies to capitalize on rapid growth in emerging markets like China, India and Latin America, and earn much stronger profits than if they were totally dependent on the U.S. economy.

One reason that the U.S. stock market has been strong over the last two years is that despite lackluster growth in the big economies of the U.S. and Europe, the S&P 500 Index, by dint of its global exposure, continues to reflect relatively strong growth internationally relative to growth in the U.S.



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