Table 1: S&P 500 Foreign Sales by Region from 2012 through 2014
Source: S&P 500 2014: Global Sales; Howard Silverblatt, Senior Index Analyst, Table by R. Ferri
Revenue from foreign sales appears to be well-diversified globally. We can see that Asia and Europe make up at least 7.8% and 7.5% of S&P 500 sales, respectively, and this could be much higher, because 22.2% of reported foreign sales are not broken out. This data also supports Bogle’s view that a U.S.-only portfolio may be adequately diversified internationally.
The S&P 500: 2014 Global Sales report also provides data on the industries that make up foreign sales. Here we find a mixed message. Some industries have broad global distribution and others are more localized. Technology, energy and materials are easy to export and have the highest foreign sales as a percentage of all sales. Financial services, consumer staples and probably basic utilities have more localized businesses. Figure 2 provides insight into the industry breakdown.
Figure 2: Foreign Sales as a Percentage of All Sales for S&P Industry Groups
Source: S&P 500 2014: Global Sales; Howard Silverblatt, Senior Index Analyst, Chart by R. Ferri
Industry diversification is where Bogle’s view on forgoing direct foreign stock exposure may break down. Some industries can export more easily and other industries do not have that benefit. Electric utility companies are constrained by local electric utility and are a prime example of a home bias. A direct investment in foreign stocks would round out a global portfolio by including foreign companies with localized industries.
John Bogle doesn’t embrace direct ownership of foreign stocks, while I believe there is a worthwhile diversification benefit to owning them. It appears we’re both right in some respects, and perhaps it matters little in the grand scheme of things. Only time will tell. I’m putting information on the table so you can make a more informed investment decision for yourself.
For a full list of relevant disclosures, click here. Rick Ferri, founder of Michigan-based Portfolio Solutions, is a widely recognized index investor and the author of several books on index investing.
