US and international stocks often perform differently, which is why the result of owning both is usually a better-diversified portfolio. There are many reasons for these performance disparities, such as different economic conditions, different laws and regulations, and different effects from currency movements. Yet there’s another key difference that’s often overlooked: US and international stock markets tend to be made up of very different types of companies.
Led by companies such as Apple, Google, Microsoft, technology is the biggest sector in the S&P 500 index of large US stocks. Since there are fewer large technology companies based in foreign countries, however, technology is one of the smaller sectors among international stocks. In the other direction, the financials and materials sectors are much better represented among international stocks than among US stocks.
For individual countries, the differences with the US can get even more extreme. About half of Russia’s stock market is comprised of energy companies, compared to less than 10% in the US. And many emerging markets, including Brazil, China, and Russia, have almost no companies in the health care sector.
As a result of these differing sector breakdowns, factors that help or hurt a specific sector can disproportionately affect the performance of stock markets in some countries. When deciding how to invest internationally, understanding the implications for the sector exposures of your portfolio is an important consideration.