U.S. vs. the World: Sectors Matter

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Includes: BIK, GML, GMM, GWL, IEV, JPP, SPY
by: IndexUniverse

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

Click to enlarge

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

Click to enlarge

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

Click to enlarge

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

Click to enlarge

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

Click to enlarge

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

Click to enlarge

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.