Bob Pisani was on a new riff yesterday saying the the S&P 500 is a global index not a US index because 48% of the earnings reported by SPX' components come from overseas.
On the surface I disagree completely. Global companies can benefit from doing some portion of their business overseas but this does nothing to somehow increase the correlation of a US stock to the index of some foreign market it does business in.
To the extent that the 48% smooths out the earnings of the index is a positive but again there is no magic bullet for increased correlation.
It is perfectly valid to buy a company because it benefits from its overseas business but you are likely to be disappointed if you expect a US multinational to track some other country. I have made this argument several times in the past.
But let's look at it the other way, let's say Bob is right, the S&P 500 is a global index for the very reason he says. Markets are becoming more globally interdependent. We have all heard this and it makes sense even if the extent of globalization could debated.
If this is true, and it may be, then this is all the more reason to not think of iShares MSCI EAFE (EFA) as a good way to diversify your portfolio, a subject I wrote about the other day. Maybe EFA should instead be thought of as a substitute for some portion of the dollars allocated to SPY and other broad-based index funds?
Sound crazy? Well maybe it is but SPY and EFA have a 0.846 correlation (according to PortfolioScience.com), the dollar might continue to get weaker and the markets that dominate EFA may continue to outperform the US market.
Really the point here is more of a reiteration of what EFA cannot do for a portfolio which, in my opinion, is create diversification for the few times during a stock market cycle when you most need it.
To the extent that this holds water it speaks to the rolling up of the sleeves that investors need to do to one way or another to create diversification for themselves. Of course that assumes that most investors are interested in the type of diversification that gives the chance for a smoother ride during rocky times.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
5 comments:
I think calling it a global index is a bit too blanketed. It's certainly diversified with companies being involved in multiple economies. However, there is still a 52% representation right here in the U.S. Further, these companies all get paid in dollars. That makes the index a predominantly U.S. index.
Doesn't the "48% of earnings are from overseas" argument just add evidence to the fact that the major global markets are more reliant on each other, then in years past?
Roger:
As far as choosing a S&P 500 ETF for investment purposes, do you have a preference for which one to select? It looks like IVE is the best choice based on historical performance. Thx.
Roger debating Bob Pisani of CNBC....
two intellectual giants of the the investment world turned gladiators....perhaps we could get larry king to moderate the debate....
i think we may be entering the bubble phase....or the twilight zone....
Peter Lynch preached to 'buy what you know'. Has anyone trekked through Europe lately? Their economy is zooming. Why? What is going on there that is not here in USA?
Post a Comment