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What Matters More, Sectors or Countries?

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It’s common for investors to focus on investing in a country or region. But buying the stock of a company that happens to be in a certain country isn’t the same thing as owning shares of that country. In fact, the sector in which a company operates can be much more important than where it’s located.

For example, over the past five years, Japanese stocks in the consumer staples sector have behaved much more like consumer staples stocks from around the world than they have other Japanese stocks. And that’s in spite of dramatic domestic factors, including two recessions and an aggressive monetary policy.

Here’s another example, this time from Europe. Given the region’s double-digit unemployment rate, recessions in some European countries and weak lending to consumers, you might assume that stocks in Europe’s consumer discretionary sector have languished over the past few years. But the fact is, Europe’s consumer discretionary stocks rose at an annualized 21% in dollar terms, similar to the 23% return of U.S.-based consumer discretionary stocks.* 

So you can see, sectors are generally more important than geography when it comes to the performance of large-cap stocks in developed countries.

However, regional and country-specific factors tend to have more influence on the performance of international small-cap and emerging-market stocks. 

That means it’s still possible to benefit from country-specific diversification by investing in the stocks of small-cap and emerging-market-based companies.

New growth engines are emerging, and they’re likely to drive the performance of the global sectors over the next decade. Limiting your international exposure may mean missing out on future opportunities. These growth engines are the subject of our next video.
 

* As measured by the MSCI Europe Consumer Discretionary Index and MSCI USA Consumer Discretionary Index from June 30, 2012, to June 30, 2015.

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.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

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. Investing in emerging markets may accentuate these risks.

©2015 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.

Definitions

MSCI World Consumer Staple is designed to capture the large- and mid-cap segments across 23 Developed Markets (DM) around the world. All securities in the index are classified in the Consumer Staples sector as per the Global Industry Classification Standard (GICS®).

MSCI Europe Consumer Discretionary is designed to capture the large- and mid-cap segments across 15 Developed Markets (DM) countries in Europe*. All securities in the index are classified in the Consumer Discretionary sector as per the Global Industry Classification Standard (GICS®).

MSCI USA Investable Market Index (IMI) Consumer Discretionary is designed to capture the large-, mid- and small-cap segments of the US equity universe. All securities in the index are classified in the Consumer Discretionary sector according to the Global Industry Classification Standard (GICS®).

MSCI Japan Index is a free-float adjusted market capitalization weighted index that is designed to track the equity market performance of Japanese securities listed on Tokyo Stock Exchange, Osaka Stock Exchange, JASDAQ and Nagoya Stock Exchange. The MSCI Japan Total Return Index takes into account both price performance and income from dividend payments. The MSCI Japan Index is constructed based on the MSCI Global Investable Market Indices Methodology, targeting a free-float market capitalization coverage of 85%.

(0815-7KXX)

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