International (Non-US) versus US Equities (The "Arguments")

[Tom_T]

How much correlation is there between U.S. and international when markets are down?

Today is a down day for the markets, so far at least. VT, VTI, VOO, VXUS are all down ~1.2%. Of course, it's only one day, but I wonder just how much it will help to own a broad international index if the U.S. markets are sinking, and if the historical data tells us anything. Are the markets more interrelated now than they once were?

[Da5id]

How much correlation is there between U.S. and international when markets are down?

Today is a down day for the markets, so far at least. VT, VTI, VOO, VXUS are all down ~1.2%. Of course, it's only one day, but I wonder just how much it will help to own a broad international index if the U.S. markets are sinking, and if the historical data tells us anything. Are the markets more interrelated now than they once were?

Not a direct answer, but similar questions might be "how helpful is it to own lots of individual US stocks (say via an index) if US stocks are correlated with each other?" or "How helpful is it to own multiple/all US sectors if US sectors are correlated with each other?"

[asif408]

How much correlation is there between U.S. and international when markets are down?

Today is a down day for the markets, so far at least. VT, VTI, VOO, VXUS are all down ~1.2%. Of course, it's only one day, but I wonder just how much it will help to own a broad international index if the U.S. markets are sinking, and if the historical data tells us anything. Are the markets more interrelated now than they once were?

What you will see is that basically, yes, over very short time frames (days, months) correlations are near 1. But extend the time frame out and correlations are not consistently higher on multi year and decade time frames. In other words, diversification, generally speaking, doesn't protect you from bad days and months, but can protect you from a bad stretch of years or a bad decade or two. For example, compare US vs developed ex-US, vs. emerging markets for 2000-2010 and 2010-2024.

Let's start with the 2000s: https://www.portfoliovisualizer.com/bac ... lEDkcA3CEV EM stocks fell just as much in the 2000-2002 bear market as US stocks, and fell more in the 2007-2009 financial crisis. Correlations were highest during those bad periods. Yet EM returned 8% real vs. -1.2% real over that decade. What was the difference? Two things: EM stocks has a shorter bear market and recovered faster in 2000-2002. The other part is that in the bull market portion of that decade, they marched much higher and faster. And if you were lucky enough to invest only in EM value during that decade you achieved a 12% real return.

If you only invested in the best performer in 2010-2024 (US), you'll see the same type of behavior but in the reverse. US stocks did fall less when foreign stocks fell more, and recovered faster. In some years they actually achieved a positive return when foreign stocks were negative.

Interestingly, those who concentrated in only US or only EM for both decades has to suffer through a decade of negative returns (2010s for EM only investors and 2000s for US only investors). But a naive mix of 1/3 US, 1/3 developed ex-US, and 1/3 EM achieved positive real returns in both decades. In other words, even though correlations were high significant times during the last 25 years, the times that they weren't provided enough diversification to prevent a lost decade. You can see examples of individual years (2001 and 2002 for EM and 2013 and 2018 for US) where having diversification helped. And there doesn't appear to be evidence of permanently higher correlations; in fact, on average in the last 10 years we've seen a decline in correlations compared to the previous 10.

[Glawen]

Hey everyone. I live in the USA. I have both taxable and tax advantaged accounts.

Does it make sense to hold market weight (60:40) domestic:international in my tax advantaged (where the higher dividend won't be a tax drag), and hold closer to 70:30 or 80:20 in my taxable account to avoid the extra taxes there?

I recently did the same tax optomization with bonds, putting vglt in my taxable and putting bnd/bndx in my tax advantaged.

I appologize if this has already been answered in this thread, I have not read all 100 pages of it.

[SB1234]

Hey everyone. I live in the USA. I have both taxable and tax advantaged accounts.

Does it make sense to hold market weight (60:40) domestic:international in my tax advantaged (where the higher dividend won't be a tax drag), and hold closer to 70:30 or 80:20 in my taxable account to avoid the extra taxes there?

I recently did the same tax optomization with bonds, putting vglt in my taxable and putting bnd/bndx in my tax advantaged.

I appologize if this has already been answered in this thread, I have not read all 100 pages of it.

If you have a sizeable portfolio, then it actually makes sense to have a higher percent of international in taxable so as to take advantage of the foreign tax credit.

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

I had previously done a quick calculation to determine how much drag there could be in holding international in Tax Advantaged vs Taxable.

One way to estimate the drag is check this document
https://personal1.vanguard.com/pdf/FTC_2023.pdf

Which lists 8.52% as the taxes on dividends for vxus
The dividend yield is 3.34%. So the total taxes in terms of expense ratio is around 0.289 or 0.3%.
If you hold international in a 401k or IRA then you cannot get FTC credit. So that's a 0.3% performance drag compared to holding in taxable. year in year out.

[Nathan Drake]

How much correlation is there between U.S. and international when markets are down?

Today is a down day for the markets, so far at least. VT, VTI, VOO, VXUS are all down ~1.2%. Of course, it's only one day, but I wonder just how much it will help to own a broad international index if the U.S. markets are sinking, and if the historical data tells us anything. Are the markets more interrelated now than they once were?

Equity investors should not care about short term correlations.

This last decade US performed 13% vs exUS at 5%, despite high daily correlations

[Nathan Drake]

Hey everyone. I live in the USA. I have both taxable and tax advantaged accounts.

Does it make sense to hold market weight (60:40) domestic:international in my tax advantaged (where the higher dividend won't be a tax drag), and hold closer to 70:30 or 80:20 in my taxable account to avoid the extra taxes there?

I recently did the same tax optomization with bonds, putting vglt in my taxable and putting bnd/bndx in my tax advantaged.

I appologize if this has already been answered in this thread, I have not read all 100 pages of it.

If you have a sizeable portfolio, then it actually makes sense to have a higher percent of international in taxable so as to take advantage of the foreign tax credit.

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

I had previously done a quick calculation to determine how much drag there could be in holding international in Tax Advantaged vs Taxable.

One way to estimate the drag is check this document
https://personal1.vanguard.com/pdf/FTC_2023.pdf

Which lists 8.52% as the taxes on dividends for vxus
The dividend yield is 3.34%. So the total taxes in terms of expense ratio is around 0.289 or 0.3%.
If you hold international in a 401k or IRA then you cannot get FTC credit. So that's a 0.3% performance drag compared to holding in taxable. year in year out.

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

[ez_mode]

US broad market cap weighted indexes owe their multi-decade outperformance relative to INTL to US dominance of cutting edge innovative mega cap tech growth companies. If you omitted these companies from your portfolio due to overvaluation concerns by traditional measures, your returns have suffered mightily YTD, 1yr, 5yr, 10yr, 15yr, and 20 yr. By realistic valuation measures, these tech firms were consistently overpriced the whole way. Yet, they thrived while value stocks as well as most stocks in general were left in the dust. The massive outperformance of mega cap tech growth was driven by high quality companies with wide moats, tons of cash, dominance in their markets, and assured future profit growth. But a greater contribution to success came from margin expansion due to hype about the future. Not the totally unrealistic hype of the late 1990s yet IMO, but lofty expectations of future profits which may or may not meet reality.

The rapid introduction of one world changing innovation after another--internet, smart phones, cloud computing, online gaming and shopping, social media, and the latest hype, AI--the world is changing so quickly and so thoroughly. The entire economy and stock market participants as well seem to driven by a dream of getting on board the next NVDA early. Massive amounts of investor money flows into tech innovation firms while many solid stable traditional businesses with real profits are out of the spotlight and neglected. The last and current tech darling is NVDA which now dominates AI chips, but before it similar levels of hype drove up prices of AMZN, AAPL, MSFT, GOOG,FB/META, TSLA into the stratosphere rapidly becoming trillion dollar mega cap stocks.

These are sexy stocks and the frenetic market is obsessed by them, picking future winners and ignoring current sound fundamental valued stocks. Meanwhile the overlooked stocks (V, especially SCV, and INTL) as well as most stocks get cheaper relative to the winners. I agree with Larry that margin expansion in excess of fundamentals cannot go on forever. However, everyone who has bet big on mega cap tech darlings over the last 20 years has done very well indeed. This behavior has become deeply entrenched and will not disappear overnight. We don't focus on PE,PB, DIV, etc.. Instead we focus on picking future tech winners. VTI which has heavy doses of them has prospered and I am glad it is by far the dominant holding in my portfolio.

I personally am not comfortable at this point in overweighting these names above their already robust levels in VTI. At some point, I expect the happy carefree tech darling music will stop and this game of musical chairs will end. I do not think it will be anytime soon. Every now and then there has been a temporary drop in AI enthusiasm. Worry comes into the picture and a brief semi-correction occurs in the magnificent 7. This is actually a positive sign for the market IMO. Bull markets need a climb a wall of worry to climb and die when investors are worry free and ecstatic. It is not possible to reliably pick when this thing will turn around but it is likely at some point to occur. I believe it's wise to hold some level of long term losers like INTL and SCV. Mega cap tech sits on a lofty valuation perch, a long way to fall if something unexpected happens. Lots of good future news already baked into current valuations and that good news may or may not show up when the time comes. I will continue to hold them at cap weight, but at the same time I will add modest levels of their hype-free opposites (SCV, INTL) for diversification. I believe it wise to prepare for everything including what currently looks very unlikely to happen.

Garland Whizzer

US value stocks have done just fine over the last 15 years: https://www.portfoliovisualizer.com/bac ... 8tuoUdTNYz

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

[Beensabu]

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

https://www.federalreserve.gov/econres/ ... eturns.htm

See page 84 of this thread starting here.

Also a thread from 2022: viewtopic.php?t=389208

If you're interested, anyway.

[ez_mode]

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

https://www.federalreserve.gov/econres/ ... eturns.htm

See page 84 of this thread starting here.

Also a thread from 2022: viewtopic.php?t=389208

If you're interested, anyway.

The whole world experienced declining interest rates during that period, some rates even negative. US stocks still handsomely outperformed international.

[GaryA505]

US broad market cap weighted indexes owe their multi-decade outperformance relative to INTL to US dominance of cutting edge innovative mega cap tech growth companies. If you omitted these companies from your portfolio due to overvaluation concerns by traditional measures, your returns have suffered mightily YTD, 1yr, 5yr, 10yr, 15yr, and 20 yr. By realistic valuation measures, these tech firms were consistently overpriced the whole way. Yet, they thrived while value stocks as well as most stocks in general were left in the dust. The massive outperformance of mega cap tech growth was driven by high quality companies with wide moats, tons of cash, dominance in their markets, and assured future profit growth. But a greater contribution to success came from margin expansion due to hype about the future. Not the totally unrealistic hype of the late 1990s yet IMO, but lofty expectations of future profits which may or may not meet reality.

The rapid introduction of one world changing innovation after another--internet, smart phones, cloud computing, online gaming and shopping, social media, and the latest hype, AI--the world is changing so quickly and so thoroughly. The entire economy and stock market participants as well seem to driven by a dream of getting on board the next NVDA early. Massive amounts of investor money flows into tech innovation firms while many solid stable traditional businesses with real profits are out of the spotlight and neglected. The last and current tech darling is NVDA which now dominates AI chips, but before it similar levels of hype drove up prices of AMZN, AAPL, MSFT, GOOG,FB/META, TSLA into the stratosphere rapidly becoming trillion dollar mega cap stocks.

These are sexy stocks and the frenetic market is obsessed by them, picking future winners and ignoring current sound fundamental valued stocks. Meanwhile the overlooked stocks (V, especially SCV, and INTL) as well as most stocks get cheaper relative to the winners. I agree with Larry that margin expansion in excess of fundamentals cannot go on forever. However, everyone who has bet big on mega cap tech darlings over the last 20 years has done very well indeed. This behavior has become deeply entrenched and will not disappear overnight. We don't focus on PE,PB, DIV, etc.. Instead we focus on picking future tech winners. VTI which has heavy doses of them has prospered and I am glad it is by far the dominant holding in my portfolio.

I personally am not comfortable at this point in overweighting these names above their already robust levels in VTI. At some point, I expect the happy carefree tech darling music will stop and this game of musical chairs will end. I do not think it will be anytime soon. Every now and then there has been a temporary drop in AI enthusiasm. Worry comes into the picture and a brief semi-correction occurs in the magnificent 7. This is actually a positive sign for the market IMO. Bull markets need a climb a wall of worry to climb and die when investors are worry free and ecstatic. It is not possible to reliably pick when this thing will turn around but it is likely at some point to occur. I believe it's wise to hold some level of long term losers like INTL and SCV. Mega cap tech sits on a lofty valuation perch, a long way to fall if something unexpected happens. Lots of good future news already baked into current valuations and that good news may or may not show up when the time comes. I will continue to hold them at cap weight, but at the same time I will add modest levels of their hype-free opposites (SCV, INTL) for diversification. I believe it wise to prepare for everything including what currently looks very unlikely to happen.

Garland Whizzer

US value stocks have done just fine over the last 15 years: https://www.portfoliovisualizer.com/bac ... 8tuoUdTNYz

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

Are you saying that's it's somehow better to hold value stocks? If so, why?

[ez_mode]

US broad market cap weighted indexes owe their multi-decade outperformance relative to INTL to US dominance of cutting edge innovative mega cap tech growth companies. If you omitted these companies from your portfolio due to overvaluation concerns by traditional measures, your returns have suffered mightily YTD, 1yr, 5yr, 10yr, 15yr, and 20 yr. By realistic valuation measures, these tech firms were consistently overpriced the whole way. Yet, they thrived while value stocks as well as most stocks in general were left in the dust. The massive outperformance of mega cap tech growth was driven by high quality companies with wide moats, tons of cash, dominance in their markets, and assured future profit growth. But a greater contribution to success came from margin expansion due to hype about the future. Not the totally unrealistic hype of the late 1990s yet IMO, but lofty expectations of future profits which may or may not meet reality.

The rapid introduction of one world changing innovation after another--internet, smart phones, cloud computing, online gaming and shopping, social media, and the latest hype, AI--the world is changing so quickly and so thoroughly. The entire economy and stock market participants as well seem to driven by a dream of getting on board the next NVDA early. Massive amounts of investor money flows into tech innovation firms while many solid stable traditional businesses with real profits are out of the spotlight and neglected. The last and current tech darling is NVDA which now dominates AI chips, but before it similar levels of hype drove up prices of AMZN, AAPL, MSFT, GOOG,FB/META, TSLA into the stratosphere rapidly becoming trillion dollar mega cap stocks.

These are sexy stocks and the frenetic market is obsessed by them, picking future winners and ignoring current sound fundamental valued stocks. Meanwhile the overlooked stocks (V, especially SCV, and INTL) as well as most stocks get cheaper relative to the winners. I agree with Larry that margin expansion in excess of fundamentals cannot go on forever. However, everyone who has bet big on mega cap tech darlings over the last 20 years has done very well indeed. This behavior has become deeply entrenched and will not disappear overnight. We don't focus on PE,PB, DIV, etc.. Instead we focus on picking future tech winners. VTI which has heavy doses of them has prospered and I am glad it is by far the dominant holding in my portfolio.

I personally am not comfortable at this point in overweighting these names above their already robust levels in VTI. At some point, I expect the happy carefree tech darling music will stop and this game of musical chairs will end. I do not think it will be anytime soon. Every now and then there has been a temporary drop in AI enthusiasm. Worry comes into the picture and a brief semi-correction occurs in the magnificent 7. This is actually a positive sign for the market IMO. Bull markets need a climb a wall of worry to climb and die when investors are worry free and ecstatic. It is not possible to reliably pick when this thing will turn around but it is likely at some point to occur. I believe it's wise to hold some level of long term losers like INTL and SCV. Mega cap tech sits on a lofty valuation perch, a long way to fall if something unexpected happens. Lots of good future news already baked into current valuations and that good news may or may not show up when the time comes. I will continue to hold them at cap weight, but at the same time I will add modest levels of their hype-free opposites (SCV, INTL) for diversification. I believe it wise to prepare for everything including what currently looks very unlikely to happen.

Garland Whizzer

US value stocks have done just fine over the last 15 years: https://www.portfoliovisualizer.com/bac ... 8tuoUdTNYz

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

Are you saying that's it's somehow better to hold value stocks? If so, why?

No. I’m saying the myth of US only outperforming international solely due to overvalued tech stocks is categorically false. Value contains none of the “overpriced” tech stocks yet still outperformed international.

[Beensabu]

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

https://www.federalreserve.gov/econres/ ... eturns.htm

See page 84 of this thread starting here.

Also a thread from 2022: viewtopic.php?t=389208

If you're interested, anyway.

The whole world experienced declining interest rates during that period, some rates even negative. US stocks still handsomely outperformed international.

You clearly did not read the linked paper by Michael Smolyansky. I guess you're not interested. That's okay.

[SB1234]

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

[Nathan Drake]

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

[SB1234]

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

[Circle the Wagons]

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

Absolutely. FTC is worth 20-25 bps? Tax drag on dividends in almost any bracket situation is higher than that, and often much higher. VXUS yield was 3.28% last year with <60% qualified. IXUS only somewhat better.

[SB1234]

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

Absolutely. FTC is worth 20-25 bps? Tax drag on dividends in almost any bracket situation is higher than that, and often much higher. VXUS yield was 3.28% last year with <60% qualified. IXUS only somewhat better.

A lot of this analysis implicitly and conveniently assumes that you will never pay tax on the international funds in your tax deferred.
The question is do you pay tax now and get ftc or do you pay tax later and never get the ftc. ( That has compounded at 25 bps pa)

[watchnerd]

Maybe in 30 years people will be able to look back and see that it didn't matter if US investors held ex-US or not.

Or it may be possible that in 30 years equities have been replaced by other financial instruments, such as smart contracts.

[Circle the Wagons]

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

Absolutely. FTC is worth 20-25 bps? Tax drag on dividends in almost any bracket situation is higher than that, and often much higher. VXUS yield was 3.28% last year with <60% qualified. IXUS only somewhat better.

A lot of this analysis implicitly and conveniently assumes that you will never pay tax on the international funds in your tax deferred.
The question is do you pay tax now and get ftc or do you pay tax later and never get the ftc. ( That has compounded at 25 bps pa)

If you need to put something in taxable, it usually makes sense to minimize tax drag. That would be US over int'l, even net of the relatively small FTC benefit. Often, it would even be munis over int'l.

[watchnerd]

Maybe in 30 years people will be able to look back and see that it didn't matter if US investors held ex-US or not.

In 30 more years people will look back and wonder why anyone even bothered investing in anything besides Microsoft and Apple

I work in the tech industry and I'm skeptical that either of those companies will be great investments 30 years from now.

[comeinvest]

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

Absolutely. FTC is worth 20-25 bps? Tax drag on dividends in almost any bracket situation is higher than that, and often much higher. VXUS yield was 3.28% last year with <60% qualified. IXUS only somewhat better.

Interesting how <60% are qualified. Listed stocks from almost all countries around the globe are qualified; Hong Kong and Singapore are the notable exceptions that I know. (I know because I buy individual foreign stocks from all over the world, and almost all my dividends are qualified on the 1099.) Does the disqualification come from trading within the fund?

[unwitting_gulag]

It is sometimes possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts. If all else is equal, the existence of the credit may make it advantageous to prioritize these funds in the taxable account. Whether or not the foreign tax credit is enough depends on factors such as the the percentage of the fund's foreign source income component, the foreign tax rate, the percentage of the foreign dividends that are qualified, and your US marginal tax bracket.

src: https://www.bogleheads.org/wiki/Tax-eff ... _placement

No it doesn’t, exUS has much higher dividends, all advice points to holding it in tax advantaged accounts

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

It's true. One gets the tax credit for foreign taxes paid. Dollar-for-dollar, assuming certain type-of-income eligibility is met. But then, the ex-US fund has US-based income too, in the form of dividends. These are a higher percent than for the S&P 500... maybe around twice as high, at current rates. Taxes have to be paid on that, annually. For large taxable portfolios, these can be... costly.

[Circle the Wagons]

well it can''t be all advice can it. perhaps you can qualify it by saying "all advice you read"

The tax drag on dividends are more significant than the foreign tax credit received

No way.

Absolutely. FTC is worth 20-25 bps? Tax drag on dividends in almost any bracket situation is higher than that, and often much higher. VXUS yield was 3.28% last year with <60% qualified. IXUS only somewhat better.

Interesting how <60% are qualified. Listed stocks from almost all countries around the globe are qualified; Hong Kong and Singapore are the notable exceptions that I know. (I know because I buy individual foreign stocks from all over the world, and almost all my dividends are qualified on the 1099.) Does the disqualification come from trading within the fund?

Not sure but agree it's curious. 2024 estimates for QDI are higher.

Even if it were 100% qualified, I'm sticking it in tax advantaged if I can.

[Nathan Drake]

US broad market cap weighted indexes owe their multi-decade outperformance relative to INTL to US dominance of cutting edge innovative mega cap tech growth companies. If you omitted these companies from your portfolio due to overvaluation concerns by traditional measures, your returns have suffered mightily YTD, 1yr, 5yr, 10yr, 15yr, and 20 yr. By realistic valuation measures, these tech firms were consistently overpriced the whole way. Yet, they thrived while value stocks as well as most stocks in general were left in the dust. The massive outperformance of mega cap tech growth was driven by high quality companies with wide moats, tons of cash, dominance in their markets, and assured future profit growth. But a greater contribution to success came from margin expansion due to hype about the future. Not the totally unrealistic hype of the late 1990s yet IMO, but lofty expectations of future profits which may or may not meet reality.

The rapid introduction of one world changing innovation after another--internet, smart phones, cloud computing, online gaming and shopping, social media, and the latest hype, AI--the world is changing so quickly and so thoroughly. The entire economy and stock market participants as well seem to driven by a dream of getting on board the next NVDA early. Massive amounts of investor money flows into tech innovation firms while many solid stable traditional businesses with real profits are out of the spotlight and neglected. The last and current tech darling is NVDA which now dominates AI chips, but before it similar levels of hype drove up prices of AMZN, AAPL, MSFT, GOOG,FB/META, TSLA into the stratosphere rapidly becoming trillion dollar mega cap stocks.

These are sexy stocks and the frenetic market is obsessed by them, picking future winners and ignoring current sound fundamental valued stocks. Meanwhile the overlooked stocks (V, especially SCV, and INTL) as well as most stocks get cheaper relative to the winners. I agree with Larry that margin expansion in excess of fundamentals cannot go on forever. However, everyone who has bet big on mega cap tech darlings over the last 20 years has done very well indeed. This behavior has become deeply entrenched and will not disappear overnight. We don't focus on PE,PB, DIV, etc.. Instead we focus on picking future tech winners. VTI which has heavy doses of them has prospered and I am glad it is by far the dominant holding in my portfolio.

I personally am not comfortable at this point in overweighting these names above their already robust levels in VTI. At some point, I expect the happy carefree tech darling music will stop and this game of musical chairs will end. I do not think it will be anytime soon. Every now and then there has been a temporary drop in AI enthusiasm. Worry comes into the picture and a brief semi-correction occurs in the magnificent 7. This is actually a positive sign for the market IMO. Bull markets need a climb a wall of worry to climb and die when investors are worry free and ecstatic. It is not possible to reliably pick when this thing will turn around but it is likely at some point to occur. I believe it's wise to hold some level of long term losers like INTL and SCV. Mega cap tech sits on a lofty valuation perch, a long way to fall if something unexpected happens. Lots of good future news already baked into current valuations and that good news may or may not show up when the time comes. I will continue to hold them at cap weight, but at the same time I will add modest levels of their hype-free opposites (SCV, INTL) for diversification. I believe it wise to prepare for everything including what currently looks very unlikely to happen.

Garland Whizzer

US value stocks have done just fine over the last 15 years: https://www.portfoliovisualizer.com/bac ... 8tuoUdTNYz

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

Run the analysis with DISVX and you also get "close enough" to US SCV. If you run it with VWIGX (Growth for international rather than Value) you get even higher returns internationally.

So the prevailing theme is that US > exUS and Growth > Value. This holds broadly true still. Some conditions don't appear to be as consistent, with Large > Small in the US only, and the opposite in exUS. Being broadly diversified across the spectrums of asset classes and factors led to satisfactory returns, even if they weren't the absolute best for the period.

If you had invested in International Growth or International Small Value you did substantially better than International MCW.

https://testfol.io/?d=eJytj01LAzEQhv%2F ... F3wyezgLAy

[comeinvest]

US broad market cap weighted indexes owe their multi-decade outperformance relative to INTL to US dominance of cutting edge innovative mega cap tech growth companies. If you omitted these companies from your portfolio due to overvaluation concerns by traditional measures, your returns have suffered mightily YTD, 1yr, 5yr, 10yr, 15yr, and 20 yr. By realistic valuation measures, these tech firms were consistently overpriced the whole way. Yet, they thrived while value stocks as well as most stocks in general were left in the dust. The massive outperformance of mega cap tech growth was driven by high quality companies with wide moats, tons of cash, dominance in their markets, and assured future profit growth. But a greater contribution to success came from margin expansion due to hype about the future. Not the totally unrealistic hype of the late 1990s yet IMO, but lofty expectations of future profits which may or may not meet reality.

The rapid introduction of one world changing innovation after another--internet, smart phones, cloud computing, online gaming and shopping, social media, and the latest hype, AI--the world is changing so quickly and so thoroughly. The entire economy and stock market participants as well seem to driven by a dream of getting on board the next NVDA early. Massive amounts of investor money flows into tech innovation firms while many solid stable traditional businesses with real profits are out of the spotlight and neglected. The last and current tech darling is NVDA which now dominates AI chips, but before it similar levels of hype drove up prices of AMZN, AAPL, MSFT, GOOG,FB/META, TSLA into the stratosphere rapidly becoming trillion dollar mega cap stocks.

These are sexy stocks and the frenetic market is obsessed by them, picking future winners and ignoring current sound fundamental valued stocks. Meanwhile the overlooked stocks (V, especially SCV, and INTL) as well as most stocks get cheaper relative to the winners. I agree with Larry that margin expansion in excess of fundamentals cannot go on forever. However, everyone who has bet big on mega cap tech darlings over the last 20 years has done very well indeed. This behavior has become deeply entrenched and will not disappear overnight. We don't focus on PE,PB, DIV, etc.. Instead we focus on picking future tech winners. VTI which has heavy doses of them has prospered and I am glad it is by far the dominant holding in my portfolio.

I personally am not comfortable at this point in overweighting these names above their already robust levels in VTI. At some point, I expect the happy carefree tech darling music will stop and this game of musical chairs will end. I do not think it will be anytime soon. Every now and then there has been a temporary drop in AI enthusiasm. Worry comes into the picture and a brief semi-correction occurs in the magnificent 7. This is actually a positive sign for the market IMO. Bull markets need a climb a wall of worry to climb and die when investors are worry free and ecstatic. It is not possible to reliably pick when this thing will turn around but it is likely at some point to occur. I believe it's wise to hold some level of long term losers like INTL and SCV. Mega cap tech sits on a lofty valuation perch, a long way to fall if something unexpected happens. Lots of good future news already baked into current valuations and that good news may or may not show up when the time comes. I will continue to hold them at cap weight, but at the same time I will add modest levels of their hype-free opposites (SCV, INTL) for diversification. I believe it wise to prepare for everything including what currently looks very unlikely to happen.

Garland Whizzer

US value stocks have done just fine over the last 15 years: https://www.portfoliovisualizer.com/bac ... 8tuoUdTNYz

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

Run the analysis with DISVX and you also get "close enough" to US SCV. If you run it with VWIGX (Growth for international rather than Value) you get even higher returns internationally.

So the prevailing theme is that US > exUS and Growth > Value. This holds broadly true still.

If you had invested in International Growth or International Small Value you did substantially better than International MCW.

https://testfol.io/?d=eJytj01LAzEQhv%2F ... F3wyezgLAy

A reminder that it is might be a good idea to diversify among large and small caps and factors (just in case). Here is Nathan's chart. DISVX = International SCV / DFSVX = U.S. SCV / VWIGX = International large growth.

[ez_mode]

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

https://www.federalreserve.gov/econres/ ... eturns.htm

See page 84 of this thread starting here.

Also a thread from 2022: viewtopic.php?t=389208

If you're interested, anyway.

The whole world experienced declining interest rates during that period, some rates even negative. US stocks still handsomely outperformed international.

You clearly did not read the linked paper by Michael Smolyansky. I guess you're not interested. That's okay.

Correct, not interested. We can look backwards and create an infinite number of narratives as to why something happened, but at the end of the day it is irrelevant. There is no consensus on why international has so drastically underperformed for the last 30+ years. We can cherry pick start and end points, massage numbers until they tell the story you want to tell, and make predictions on the future, but none of it matters. All that matters is sticking with your strategy, being comfortable with your plan, and not second guessing yourself every time some "expert" writes a new white paper.

[Beensabu]

There is no consensus on why international has so drastically underperformed for the last 30+ years.

There are several reasons why, which have all been mentioned in this thread at some point, as well as in various articles and papers. But you would have to be willing to read information that might challenge the narrative you have in your own head.

All that matters is sticking with your strategy, being comfortable with your plan, and not second guessing yourself every time some "expert" writes a new white paper.

I guess if you refuse to read things, you'll never second guess yourself. Good plan.

^ All publicly available information is priced in, huh, folks? Tell me again about that efficient market full of rational investors.

[Nathan Drake]

US Value excludes the high flying tech growth companies and still performs vastly superior to international over this long stretch of US outperformance. Thus, the argument that the US performance is all due to a few overvalued tech stocks doesn’t really hold water once you peak under the hood.

https://www.federalreserve.gov/econres/ ... eturns.htm

See page 84 of this thread starting here.

Also a thread from 2022: viewtopic.php?t=389208

If you're interested, anyway.

The whole world experienced declining interest rates during that period, some rates even negative. US stocks still handsomely outperformed international.

You clearly did not read the linked paper by Michael Smolyansky. I guess you're not interested. That's okay.

Correct, not interested. We can look backwards and create an infinite number of narratives as to why something happened, but at the end of the day it is irrelevant. There is no consensus on why international has so drastically underperformed for the last 30+ years. We can cherry pick start and end points, massage numbers until they tell the story you want to tell, and make predictions on the future, but none of it matters. All that matters is sticking with your strategy, being comfortable with your plan, and not second guessing yourself every time some "expert" writes a new white paper.

US stocks in 1990 went from 15 to nearly 37 CAPE, a 2.5X multiplier tailwind

ExUS stocks in 1990 went from 40 to 16 CAPE, a 60% reduction in valuations headwind, or a .4X multiplier

The relative change favoring US stocks from this alone was 6.25X

Valuations do matter and are noisy. Question is, how likely is this to repeat now that the tables are flipped from 1990?

[SB1234]

Valuations are not a law of nature.

[Nathan Drake]

Valuations are not a law of nature.

No, they are not. But in the case above, they can explain what has happened in the past. Decomposing the change in valuation is why exUS returns have been relatively poor for the last 30 years

The question is - are we counting on the US going to a CAPE of 93 while exUS goes to a CAPE of 7 in order for the trend of the last 30 years to continue?

[HomerJ]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

[HomerJ]

Going back to the original point (I did not make it): higher expectations are already reflected in US stocks' higher multiples today. For US to continue to outperform ex-US, the multiple either needs to increase even further for US equities relative to ex-US (reflecting increased future expectations about subsequent future performance) OR they need to outperform - not just outperform ex-US stocks, outperform by a margin that is more than already expected today.

In physics/math terms, we are talking about the derivative, not the rate.

Of those two, valuation expansion is probably most directly tied to interest rates.

Given today's starting conditions, I find it hard to envision a repeat of the 2010 onwards combination of beat up stock prices and ZIRP driving valuation expansion like it did in the recent past.

Thus, I find the US vs ex-US question a bit moot when faced with the elephant in the room:

Will stocks (in any domiciled country) repeat the multi-year performance of 2010-present?

Over the next 10 years, I think it's highly unlikely based on current conditions, and my planning expectations are assuming pretty low stock returns.

Here's a dirty little secret to successful investing...

ALWAYS plan around low stock returns.

Then you don't care about "current conditions" or whether or not your interpretation of said "current conditions" is correct or not.

[Nathan Drake]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

My post was not discussing whether high CAPE meant poor returns.

It was discussing the next 30 years of poor exUS relative to the US being like the last 30 years.

For that to happen, you would need an unprecedented valuation gap that looks comical on paper (7 for exUS vs 93 for US).

Possible? Sure, anything is possible. Likely? Absolutely not

[rockstar]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

US earnings only need to grow faster than exUS, which is highly likely due to sector differences. In order for exUS to beat US, exUS needs lots of multiple expansion, which seems unlikely with its sector breakout. This could happen. But it would need some catalyst.

[Nathan Drake]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

US earnings only need to grow faster than exUS, which is highly likely due to sector differences. In order for exUS to beat US, exUS needs lots of multiple expansion, which seems unlikely with its sector breakout. This could happen. But it would need some catalyst.

US earnings growing faster is already baked into the valuation. It will need to grow faster than the market expects to outperform. And to repeat the last 30 years, will need to grow it at a rate that is unprecedented and result in even higher valuations than today

[rockstar]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

US earnings only need to grow faster than exUS, which is highly likely due to sector differences. In order for exUS to beat US, exUS needs lots of multiple expansion, which seems unlikely with its sector breakout. This could happen. But it would need some catalyst.

US earnings growing faster is already baked into the valuation. It will need to grow faster than the market expects to outperform. And to repeat the last 30 years, will need to grow it at a rate that is unprecedented and result in even higher valuations than today

We’re comparing exUS to US. US only needs to grow faster than exUS. The only way for exUS to win is through multiple expansion since exUS doesn’t historically grow as fast as US. Or US needs to crash and burn like between 2000-2009.

[Nathan Drake]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

US earnings only need to grow faster than exUS, which is highly likely due to sector differences. In order for exUS to beat US, exUS needs lots of multiple expansion, which seems unlikely with its sector breakout. This could happen. But it would need some catalyst.

US earnings growing faster is already baked into the valuation. It will need to grow faster than the market expects to outperform. And to repeat the last 30 years, will need to grow it at a rate that is unprecedented and result in even higher valuations than today

We’re comparing exUS to US. US only needs to grow faster than exUS. The only way for exUS to win is through multiple expansion since exUS doesn’t historically grow as fast as US. Or US needs to crash and burn like between 2000-2009.

No, it does not need to just perform better, it needs to perform better than the market expects.

Cisco in 2000 had a high valuation. The next two decades it had far greater earnings growth than the overall S&P 500, yet did not grow as fast as expected and the greatly underperformed the market

ExUS could outperform even without any valuation expansion.

[Billy C]

US companies have had much stronger business fundamentals compared to their international competitors. Cumulative earnings of US companies increased by 100% during the 12 years from December 2010 to December 2022. Cumulative earnings of developed exUS stocks actually decreased during this period.

There was a recent post on this thread showing that the EPS growth of Japanese stocks has exceeded that of US stocks since 2010. If that’s the case then the remainder of the developed exUS index must have suffered truly horrible (more negative) EPS growth during this period to account for the final result.



Naturally given the stronger business fundamentals of US stocks, they’ve earned a higher PE ratio. The difference doesn’t seem excessive given what’s happened, as well as expectations for continued strong earnings growth for US stocks in the future. Seems very rational to me.

Could the market be wrong? Sure, but in my opinion investors would be better off focusing on a low-cost, tax-efficient, long-term buy-and-hold strategy, rather than making investment decisions based on market valuations or forecasts.

When it comes to costs/taxes, we know in advance that US-only investors have a big advantage. Compounding that advantage over an investment lifetime (50 years) makes the decision to avoid international stocks easy for me.

Specifically, for a long-term investor I am doubtful that exUS stocks will outperform US stocks by an amount sufficient to make up for their extra costs/taxes by a meaningful degree.



https://www.morningstar.com/funds/why-u ... since-2010

https://assets.contentstack.io/v3/asset ... e_2010.pdf

[Nathan Drake]

US companies have had much stronger business fundamentals compared to their international competitors. Cumulative earnings of US companies increased by 100% during the 12 years from December 2010 to December 2022. Cumulative earnings of developed exUS stocks actually decreased during this period.

There was a recent post on this thread showing that the EPS growth of Japanese stocks has exceeded that of US stocks since 2010. If that’s the case then the remainder of the developed exUS index must have suffered truly horrible (more negative) EPS growth during this period to account for the final result.



Naturally given the stronger business fundamentals of US stocks, they’ve earned a higher PE ratio. The difference doesn’t seem excessive given what’s happened, as well as expectations for continued strong earnings growth for US stocks in the future. Seems very rational to me.

Could the market be wrong? Sure, but in my opinion investors would be better off focusing on a low-cost, tax-efficient, long-term buy-and-hold strategy, rather than making investment decisions based on market valuations or forecasts.

When it comes to costs/taxes, we know in advance that US-only investors have a big advantage. Compounding that advantage over an investment lifetime (50 years) makes the decision to avoid international stocks easy for me.

Specifically, for a long-term investor I am doubtful that exUS stocks will outperform US stocks by an amount sufficient to make up for their extra costs/taxes by a meaningful degree.



https://www.morningstar.com/funds/why-u ... since-2010

https://assets.contentstack.io/v3/asset ... e_2010.pdf

The best times to invest are when business fundamentals are the worst and valuations are low. Your numbers are likely not accounting for change in currency

Cliff Asness wrote a paper on why the earnings growth for US pales in comparison to the change in valuation

https://www.aqr.com/-/media/AQR/Documen ... sc_lang=en

I would expect the relative valuation gap to generate returns in excess of the additional costs. Vanguard estimates this difference to be at least 300 basis points

[steve r]

Yes yes. Y'all need to be on Nathanheads..

Good stuff.

I am not a tilter, but certainly get the logic. Just not sure I would be able to stay the course for a few months let alone years -- which Nathan has noted is key for such strategies. My short stunt with tilting I came out ahead a wee bit when I realized this.

Always good comments by N.D. though.

[Beensabu]

For US to continue outperforming like it has the last thirty years, US PE would need to more than double to 70-80

This, of course, is incorrect.

Valuations do not NEED to go up to get good performance.

US CAPE is 35 today.

US CAPE was 35 in Jan 2001.

Yet the US stock market has returned 8.5% nominal annually over the past 23+ years.

Even with zero net change in US CAPE.

Earnings went up, so price went up, CAPE stayed the same.

Now you're just being silly.

CAPE most certainly did not stay the same. It fluctuated. It just happens to be the same right now as it was in Jan 2001.

The only point you have succeeded in making is that current valuations are similar to Jan 2001. And we all know what returns for the following decade looked like. 2.45% CAGR.

Returns go down as multiples contract, they go up as multiples expand.

They just happen to have expanded so much coming out of GFC that when you combine 10 years of 2.45% CAGR with nearly 14 years of 13.13% CAGR, you get 8.5%.

Edit: Also, that sequence of returns happened to be great for an accumulator, with the high rate of return during the later half of their accumulation period. If you flip it, with the higher returns early and the lower returns in the second half of accumulation, it's not as great.

[comeinvest]

US companies have had much stronger business fundamentals compared to their international competitors. Cumulative earnings of US companies increased by 100% during the 12 years from December 2010 to December 2022. Cumulative earnings of developed exUS stocks actually decreased during this period.

There was a recent post on this thread showing that the EPS growth of Japanese stocks has exceeded that of US stocks since 2010. If that’s the case then the remainder of the developed exUS index must have suffered truly horrible (more negative) EPS growth during this period to account for the final result.



Naturally given the stronger business fundamentals of US stocks, they’ve earned a higher PE ratio. The difference doesn’t seem excessive given what’s happened, as well as expectations for continued strong earnings growth for US stocks in the future. Seems very rational to me.

Could the market be wrong? Sure, but in my opinion investors would be better off focusing on a low-cost, tax-efficient, long-term buy-and-hold strategy, rather than making investment decisions based on market valuations or forecasts.

When it comes to costs/taxes, we know in advance that US-only investors have a big advantage. Compounding that advantage over an investment lifetime (50 years) makes the decision to avoid international stocks easy for me.

Specifically, for a long-term investor I am doubtful that exUS stocks will outperform US stocks by an amount sufficient to make up for their extra costs/taxes by a meaningful degree.



https://www.morningstar.com/funds/why-u ... since-2010

https://assets.contentstack.io/v3/asset ... e_2010.pdf

It looks like it was a combination of both earnings growth divergence, valuation multiples divergence, and also change in industry composition. A perfect storm, so to speak. None of that should change the rationale for (or the narrative against) international diversification.

[LadyGeek]

I removed an interchange regarding CAPE. The discussion was derailed.

Please stay on-topic.

[Beensabu]

It looks like it was a combination of both earnings growth divergence, valuation multiples divergence, and also change in industry composition. A perfect storm, so to speak. None of that should change the rationale for (or the narrative against) international diversification.

Don't forget the strong dollar. Mustn't forget the strong dollar.

[CraigTester]

I hate to play the “It’s already priced in” card in the middle of this great discussion…

But, unless someone has better info than the rest of the market, aren’t all these “US is better” arguments already priced in…?

Might help “explain” some of the valuation differences up to today, but do any of these points make a valid case for tilting tomorrow?

[Tom_T]

I hate to play the “It’s already priced in” card in the middle of this great discussion…

But, unless someone has better info than the rest of the market, aren’t all these “US is better” arguments already priced in…?

Might help “explain” some of the valuation differences up to today, but do any of these points make a valid case for tilting tomorrow?

Aren't all the pro-international arguments priced in as well?

Also, "priced in" doesn't mean there isn't going to be a winner and a loser, since the market isn't clairvoyant no matter what the current "bets" may be.

[CraigTester]

I hate to play the “It’s already priced in” card in the middle of this great discussion…

But, unless someone has better info than the rest of the market, aren’t all these “US is better” arguments already priced in…?

Might help “explain” some of the valuation differences up to today, but do any of these points make a valid case for tilting tomorrow?

Aren't all the pro-international arguments priced in as well?

Also, "priced in" doesn't mean there isn't going to be a winner and a loser, since the market isn't clairvoyant no matter what the current "bets" may be.

Exactly. That's why Global Market Cap seems the only logical conclusion (at least for me)...

Now per the above discussion, if someone had correctly anticipated the evolution of energy production for instance... or what would happen with Big Tech in the QE world.... or etc, etc.... "then" they would have been wise to tilt....

Absent that, enjoy Sharpe's free lunch....

[SB1234]

It looks like we may all be agreeing that the ex-US market is more risky. So this perceived higher risk combined with the investors personal risk profile will inform them what allocation between US/EXus
Eg there are many recommendations to avoid corporate fixed income even if they promise higher returns, simply because they are riskier than government debt.
So even if ExUs promises higher returns (based on valuations) the risk is also higher. So for someone wanting to reduce risk, reducing ExUs is a good strategy.

[CraigTester]

It looks like we may all be agreeing that the ex-US market is more risky. So this perceived higher risk combined with the investors personal risk profile will inform them what allocation between US/EXus
Eg there are many recommendations to avoid corporate fixed income even if they promise higher returns, simply because they are riskier than government debt.
So even if ExUs promises higher returns (based on valuations) the risk is also higher. So for someone wanting to reduce risk, reducing ExUs is a good strategy.

If you believe that markets are efficient, on a risk-adjusted basis, return expectations should be the same..... (e.g. Valuations adjust for any differences in present conditions, as we go).

Given this, as Sharpe, et al have explained, logic leads us to select Global Market Cap and pick up the free diversification lunch...

The only caveat to this is if you believe you have better (or earlier) information than the market.....

By above example, if valuethinker could leverage his insights to out-guess the market and position himself accordingly, he should.... (and hopefully share his secrets with the rest of us if he's feeling generous)....

Otherwise, we should just all eat popcorn and see what Global Market Cap does next. (IMHO)