U.S. vs. the World: Sectors Matter

By Matthew Hougan

Ever wonder why international markets perform differently from the U.S. (and each other)? Just look at the sectors.

People talk a lot about the interaction between the political economy of nation states and the performance of their markets. And it is certainly true that different countries are often at different points in the economic cycle. That's one of the reasons why diversifying overseas adds low-correlated returns to a portfolio.

But there's another reason for those differences: sectors. The sector breakdowns between regions and countries differ widely, and examining those breakdowns can help you understand why one market zigs while another market zags.

Of course, the tail wags the dog here: The sector breakdown is reflective of each region's economy, and vice versa. But sectors offer one easy way to gain insight into how and why one economy and market performs differently from another.

U.S. vs. The Developed World

If you compare the U.S. with international developed markets, for instance, you see stark differences in the sector front. The table below compares the sector breakdowns as of 10/07/08 for the S&P 500 SPDR ETF (AMEX: SPY) and the SPDR S&P World ex-US ETF (AMEX: GWL). It is ranked based on how overweight the developed international markets are vs. the S&P 500.

	Developed International	S&P 500	Difference
Financials	26.27	14.79	11.48
Materials	8.23	3.22	5.01
Telecommunications	5.55	3.22	2.33
Utilities	5.73	3.68	2.05
Industrials	12.95	11.06	1.89
Consumer Discretionary	10.02	8.33	1.69
Energy	9.04	13.17	-4.13
Health Care	8.34	13.79	-5.45
Consumer Staples	7.56	13.13	-5.57
Information Technology	6.31	15.62	-9.31

Interesting, huh? Financials make up more than one-quarter of the developed international markets, compared with less than 15% here at home. Materials are also significantly overweighted abroad. Meanwhile, U.S. markets are more heavily weighted to Information Technology, Consumer Staples, Health Care and Energy.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

U.S. vs. Europe

If we drill down inside developed markets, we find that there is a large difference between the two poles of that market: Europe and Japan.

If you compare SPY with the iShares S&P Europe 350 Index Fund (NYSEArca: IEV), you get an interesting contrast. The biggest difference between this and the developed markets comparison lies in Information Technology. Based on this ETF, Europe has virtually no allocation to Information Technology. 

	Europe	S&P 500	Difference
Financials	26.08	14.79	11.29
Utilities	8.04	3.68	4.36
Telecommunications	7.56	3.22	4.34
Materials	6.89	3.22	3.67
Consumer Discretionary	7.52	8.33	-0.81
Consumer Staples	11.18	13.13	-1.95
Energy	10.49	13.17	-2.68
Industrials	8.22	11.06	-2.84
Health Care	10.76	13.79	-3.03
Information Technology	2.82	15.62	-12.8

U.S. Vs. Japan

Things change fairly radically when you turn to Japan. For this, I used the SPDR Russell/NOMURA PRIME Japan ETF (AMEX: JPP). In Japan, the overweight allocation to Financials falls, but the allocations to Consumer Discretionary and Industrial stocks skyrocket. On the flip side, the market is heavily underweight Energy, Health Care and Consumer Staples. 

	Japan	S&P 500	Difference
Consumer Discretionary	18.1	8.33	9.77
Industrials	17.95	11.06	6.89
Financials	20.22	14.79	5.43
Materials	7.18	3.22	3.96
Utilities	5.65	3.68	1.97
Telecommunications	4.49	3.22	1.27
Information Technology	13.34	15.62	-2.28
Consumer Staples	5.7	13.13	-7.43
Health Care	5.89	13.79	-7.9
Energy	1.49	13.17	-11.68

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U.S. Vs. Emerging Markets

Things get even more interesting when you turn to the emerging markets. The following table compares SPY to the SPDR S&P Emerging Markets ETF (AMEX: GMM), and shows that much of the diversification benefit from emerging markets stems plainly from the sector breakdown of their exposure.

Emerging Markets have a huge overweight to Telecom, Materials, Financials and Energy, and major underweights to Health Care, Consumer Staples and Information Technology.

Wonder why emerging markets are volatile?

	Emerging Markets	S&P 500	Difference
Telecommunications	12.15	3.22	8.93
Materials	11.75	3.22	8.53
Financials	22.25	14.79	7.46
Energy	18.43	13.17	5.26
Utilities	3.54	3.68	-0.14
Consumer Discretionary	5.49	8.33	-2.84
Industrials	7.3	11.06	-3.76
Information Technology	10.33	15.62	-5.29
Consumer Staples	5.67	13.13	-7.46
Health Care	3.08	13.79	-10.71

U.S. Vs. Latin America

Drilling deeper, what if we looked at individual regions within emerging markets. I've heard a lot of advisors recently talk about the relative attractiveness of the Latin American market, so I thought I'd compare SPY to the SPDR S&P Emerging Latin America ETF (AMEX: GML).

The results are even more pronounced: major overweights to Materials and Telecoms, and major underweights to Health Care and Information Technology. 

	Latin America	S&P	Difference
Materials	21.02	3.22	17.8
Telecommunications	13.9	3.22	10.68
Energy	18.21	13.17	5.04
Financials	18.53	14.79	3.74
Utilities	5.67	3.68	1.99
Consumer Staples	11.24	13.13	-1.89
Consumer Discretionary	5.34	8.33	-2.99
Industrials	5.67	11.06	-5.39
Health Care	0	13.79	-13.79
Information Technology	0	15.62	-15.62

U.S. Vs. BRIC

I've written before that there is no one real "BRIC" market. The available BRIC ETFs differ widely, with differing weights to Brazil, Russia, India and China. But just to get a flavor of how sectors impact the performance of the BRICs, I compared SPY and the SPDR S&P BRIC 40 ETF (AMEX: BIK). The sector weights vs. the S&P 500 are overwhelming. I'll let the table speak for itself. 

	BRIC	S&P 500	Difference
Energy	38.25	13.17	25.08
Financials	36.59	14.79	21.8
Telecommunications	12.2	3.22	8.98
Materials	8.04	3.22	4.82
Utilities	0	3.68	-3.68
Consumer Discretionary	0	8.33	-8.33
Industrials	0.75	11.06	-10.31
Consumer Staples	1.6	13.13	-11.53
Health Care	0	13.79	-13.79
Information Technology	0	15.62	-15.62

Conclusion

After I wrote my last blog comparing sectors vs. style in the U.S., Jim Wiandt asked me what investors are supposed to "do" with this information. To me, it's obvious: Understand that these sector differences are out there and incorporate them into your decision making. A fund like BIK that includes a 38% weight to Energy is going to perform differently than an S&P 500 fund that weights Energy at 13%, regardless of what country we're talking about.

Sectors matter. This is one way to start to incorporate that into your market analysis.

Comments

[Urbane Gori...:]

The basic idea is that you have to know what the construction of your ETF or fund is. OK.

Not sure if using 10/07/2008 as a benchmark date is a good compare point. If you had used 1 year ago, before our banking collapse, I'm guessing you wold have seen a different spread.

Thanks though! jegan

2008 Oct 10 10:53 AM

[Alan Young:]

Excellent point, cogently presented. Thank you.

2008 Oct 10 03:00 PM

[George Gorski:]

The World Financial Crisis & Global Warming Connection

On Nov. 8, 2016 as a result of a change to the US constitution, the US congress and the senate allowed George W. Bush to run for president of the United States in hopes of resolving the Financial Crisis and World Depression that began in 2008.
After 8 years of depressed world economies, Bush ran a platform that convinced the United States people that aliens from Mars were responsible for the World Financial Crisis of 2008 and Global Warming. His campaign claimed aliens were living below the surface of the earth’s oceans and dumping Martian CO2 weapons of mass destruction from vent portals into the earth’s atmosphere. He claimed that the aliens living below the ocean surfaces were responsible for the disappearance and sinking of planes and ships, for example planes in the Bermuda triangle and the sinking of the Titanic. He went on to state, that the reason flying saucers appear and disappear is because the land in the oceans of the world.
He also convinced the world that Martians and not the Chinese, were responsible for circumvention of the flow of American trade dollars and the trade imbalances throughout the world economies thereby causing the World Financial Crisis. He claimed the Martians had been sucking up US greenbacks for years using an interstellar banking system and depositing them on Mars to absorb the Sun’s rays and warm the surface, hence the green planet. He went on to say, that the shortage of US greenbacks had left the US with insufficient cash to pay off its trade deficit for years.
Once elected in 2016 Bush declared war and sent 1,000,000 troops to Mars to fight the aliens. After a successful 1 year campaign without a casualty, all 1,000,000 troops returned to earth in celebration with a victory parade in New York. Though no Martians were ever captured and taken prisoner, and no green backs ever recovered, large quantities of CO2 weapons of mass destruction were found. Bush stated that the greenbacks could not be recovered from Mars because US scientists believed removing them would increase the risk of Global Warming by reflecting more of the sun’s ray towards the earth. To replace the greenbacks now on the surface of Mars, Bush convinced Congress that the US greenbacks must be replaced. He ordered the printing of 10 trillion US greenbacks the aliens had taken to Mars. This action quickly re-established the booming world economies once again.
Though the investigative reporting of CNN’s Larry King and his guests claimed no Martians or greenbacks ever existed on Mars and that no troops were ever dispatched, it could never be proven.
In 2018 the US declared War of the Underworlds. Bush rationalized that the world must rid the Martian aliens that he claimed that had resided below the surfaces of the Pacific and Atlantic oceans for hundreds of years. In addition to the fences built across the Canadian and Mexican borders and atmospheric saucer nets, he had the nations of the UN sign a War Measures Act that gave the US control of all world oceans. Since the Martians were dumping carbon dioxide into the earth’s atmosphere, US scientists believed it was poisonous to their own metabolism. The US’s secret weapon to fight the Martians was using their own weapon of mass destruction, injection of carbon dioxide into the oceans. To avoid burdening the US tax payers of the cost of the war, the UN ordered the world economies to pay for the War of the Underworlds. Since the US was the only nation that had never reduced CO2 emissions, it now was the only nation capable of providing the weapons. The US required that the world nations pay a trade credit of $1000 to the US for each tonne of CO2 that the US produced and injected into the oceans. To step up the War of the Underworlds the US ordered more coal fired plants built for the production of more CO2.

With the flow of US greenbacks re-established, the world economies booming once again and the oceans being injected with CO2 to keep Martians from living there in the future, George W. Bush was declared an International hero and awarded the Nobel Peace and BS prize in 2020.

George Gorski
Oct. 11, 2011

2008 Oct 11 11:07 AM