Understanding the S&P 500: This Index Offers a Lot of International Exposure
14 Pages Posted: 23 Dec 2013
Date Written: December 1, 2013
Abstract
This paper highlights how the international business exposure of the S&P 500 constituents has evolved over the past decade. It demonstrates that a large and increasing fraction of the revenue of the S&P 500 constituents comes from international markets. In 2010, almost 40 percent of the market-weighted sales of the S&P 500 were international. In the past decade, almost 40 percent of the S&P 500’s earnings growth came from international sales, and in some years it was almost 60 percent. The S&P 500 constituents benefit from the fast growth in the emerging markets of Latin America and Asia. The S&P 500 offers ample geographic diversification, and it benefits from emerging markets growth. The U.S. index offers sector diversification close to that of the global index.
S&P 500 provides U.S. investors with a good global diversification opportunity because U.S. firms in the index have large and increasing business exposure in international markets. As a result, the S&P 500 provides global stock market exposure to U.S. investors. These economic factors drive the high degree of co-movement between the returns of the S&P 500 and global indexes. Domestic U.S. investors achieve substantial diversification benefits, by either investing in S&P 500 index funds or actively investing using the S&P 500 as the benchmark. For active managers, understanding the extent of international exposure inherent in the S&P 500 is an important part of knowing the index characteristics.
Keywords: S&P 500, international business exposure
JEL Classification: G10, G11, G12, G15
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