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Investing Abroad? Think Sector Before Country

Slide 1: Stocks are not shares of a country
When buying non-U.S. stock, investors tend to focus on the country or region where the company is based. But according to Jeffrey Kleintop, Schwab’s chief global investment strategist, geography isn’t the first thing to evaluate. 
 
Stock market performance is more contingent on stock sectors, such as health care and technology, than on a company’s location. “When buying the stock of a company based in a certain country, it’s important to realize that it’s not like owning a share in that country,” Jeff cautions.
 
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Slide 2: Investing abroad may improve returns

So why invest abroad at all? Put simply, global exposure has been more rewarding than owning just U.S. stocks. Even though U.S. stocks outperformed global stocks during the first half of the 2010s, global exposure has historically provided better returns. In fact, the MSCI World Index (half U.S.-based, half non-U.S.) has outperformed the MSCI USA Index in three of the last four decades. Even during the 1990s, Jeff explains, “the stocks in many global sectors outperformed their domestic counterparts.”

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Slide 3: States' economies can vary widely

To see why thinking geography first is unwise, consider the United States. The economies of individual states vary—some are growing while others are shrinking. Yet few investors would focus on a single state or choose investments based primarily on one state's economic climate. Regardless of the location of their headquarters, most large U.S. companies are exposed to the economy of the entire country, if not the world. 

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Slide 4: Different sectors can dominate each state

When we look at the relative returns of New York stocks and Texas stocks, as measured by the Bloomberg Texas State Index and Bloomberg New York State Index (see sector breakdowns above), we see what’s really driving performance. Over a one-year period ending June 30, 2015, New York stocks, heavily weighted in financials, outperformed Texas stocks, which were dragged down by challenges in the energy sector, by 21%. 

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Slide 5: Sectors often correlate globally
When it comes to performance, it’s not that region doesn’t matter—it just matters less. There’s generally a stronger correlation between a regional sector and the global sector than between that regional sector and the region at large. 
 
That’s true not just at the regional level, but the individual country level as well. Take the performance of Japanese consumer staples tracked over the past five and a half years. The sector has deviated widely from Japan’s stock market but strongly correlates with the global consumer-staples sector.
 
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Slide 6: You can use sectors to mimic a region
Take a look at a hypothetical portfolio constructed to deliver performance similar to the U.S. stock market (materially different from Europe’s stock market) by combining just three European sectors. 
 
The combination works well in replicating U.S. stock market performance because the MSCI USA Index has a higher weighting in health care and information technology sectors relative to Europe’s stock market. This example shows how sector composition can drive performance in a country or region. 
 
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Slide 7: Sectors influence a country&#039;s fundamentals

Norway is an example of a country whose market is dominated by a single sector—and heavily influenced by a single company. As a result, sector performance tends to drive Norway’s stock market valuation more than domestic economic fundamentals do. Recognizing that world oil prices mean a lot more to Norway’s energy companies and the MSCI Norway Index than Norway’s unemployment rate is important to making successful investment decisions.

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Slide 8: Diversify globally, but think sector first
Limiting stock exposure to U.S.-based companies eliminates many opportunities that may offer better value and prospects. Consider investing globally—and remember, the country isn't irrelevant, but it’s not the first thing to consider. 
 
Jeff advises thinking about sectors and broad global themes: “Key long-term megatrends—broadening global economic output, population trends, big data and mobilization—cut across borders,” he observes.
 
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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Supporting documentation for any claims or statistical information is available upon request.

The MSCI World Index is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. As of August 2015, the MSCI countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the U.K. and the U.S.

The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the U.S. market. With 630 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S.

The Bloomberg State Index of New York is a capitalization-weighted index consisting of equities domiciled in New York.

The Bloomberg State Index of Texas is a capitalization-weighted index consisting of equities domiciled in Texas.

The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese markets. With 314 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan.

The MSCI Japan Consumer Staples Index is designed to capture the large- and mid-cap segments of the Japanese markets. All securities in the index are classified in the consumer staples sector as per the Global Industry Classification Standard (GICS®).

The MSCI World Consumer Staples Index is designed to capture the large- and mid-cap segments across 23 developed-market (DM) countries. All securities in the index are classified in the consumer staples sector as per the Global Industry Classification Standard (GICS®).

The MSCI Europe Index captures large- and mid-cap representation across 15 developed-market countries in Europe. With 443 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European developed-markets equity universe.

The MSCI Europe Information Technology Index is designed to capture the large- and mid-cap segments of the European markets. All securities in the index are classified in the information technology sector as per the Global Industry Classification Standard (GICS®).

The MSCI Europe Health Care Index is designed to capture the large- and mid-cap segments of the European markets. All securities in the index are classified in the health care sector as per the Global Industry Classification Standard (GICS®).

The MSCI Europe Financials Index is designed to capture the large- and mid-cap segments of the European markets. All securities in the index are classified in the financials sector as per the Global Industry Classification Standard (GICS®).

The MSCI Norway Index is designed to measure the performance of the large- and mid-cap segments of the Norwegian markets. With nine constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Norway.

(0815-7LRJ)

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