It is common for equity investors to overweight their home countries relative to the global opportunity set. Such a "home bias" means that many investors may be underallocated to U.S. equities, which accounted for 59% of global equity float market capitalization as of the end of 2021. In this paper, we:
- Highlight the relative size of the U.S. equity market, including mid- and small-cap companies;
- Demonstrate how incorporating U.S. equities can diversify domestic sector biases, provide exposure to U.S. economic growth and potentially improve risk-adjusted returns (see Exhibit 1);
- Introduce the S&P 500®, S&P MidCap 400® and S&P SmallCap 600®, collectively known as the S&P Composite 1500®; and
- Show how active managers have found it difficult to outperform index benchmarks, historically.
Relevance of U.S. Equities
Although definitions of "the market" can vary depending on one's investment objective and domicile, market participants excluding U.S. companies from their investment strategies could risk overlooking a significant portion of the global equity opportunity set.
Exhibit 2 shows that U.S.-domiciled companies accounted for 59% of the global equity market at the end of 2021. This was more than nine times the weight of the second biggest country, Japan, and more than 70 times larger than the Brazil, Chile, Colombia, Mexico and Peru segments of the S&P Global BMI, combined.
The importance of U.S. equities is even more acute within some market segments. For example, Exhibit 3 shows that U.S.-domiciled companies accounted for most of the weight in 6 of the 11 global GICS® sectors at the end of 2021 and more than two-thirds of the weight in 3 sectors. Combined with the distinct sectoral composition of the U.S. equity market—for example, Appendix B shows that countries across Latin America typically have far less exposure to Information Technology, Health Care and Communication Services—U.S. exposure may be necessary to address domestic sector biases.
