by Scott Ronalds

America dominates the global stock market. More so than ever before. U.S. companies make up 60% of the MSCI World Index, which is a widely-used measure of the global market.

To put this in perspective, the second largest constituent, Japan, makes up less than 9% of the index. Canadian companies constitute roughly 3.5%.

America’s supremacy in global markets has grown steadily over the past decade, thanks in part to the strong performance of its technology companies. For reference, U.S. companies comprised just under 50% of the index in 2010 (and under 40% in the early 1990s).

A recent article in The Economist (America’s disproportionate weight in global stockmarket indices) provides some colour on America’s dominance, and why it may not be such a good thing. As the piece suggests, “Anyone using the index to monitor the market is seeing a picture heavily distorted by Wall Street.”

The United States is a massive economic powerhouse, so why should investors be concerned about its dominant and growing weight in the global index? Two key reasons. First, you never want to put too many eggs in one basket. Investors who want broad-based exposure to global markets are in reality getting a U.S.-heavy portfolio by investing in the index or a fund that closely resembles it. And second, American companies aren’t cheap. On many measures, U.S. stocks are among the most expensive in the world. This means their upside potential is likely more limited, and more importantly, their downside risk is greater.

This isn’t meant to infer that U.S. stocks will fall of a cliff tomorrow, but rather that stocks in other parts of the world offer more attractive opportunities going forward. The Economist article notes that stock valuations in Europe, Asia and the emerging markets are considerably lower than their U.S. counterparts. Our research points to the same conclusion.

America is home to many world-class companies. We own several of them in our Equity Fund and Global Equity Fund. And we always will own U.S. stocks. That’s what good diversification is all about. But we’re more measured in our exposure than the index and many other firms, particularly in our Global Fund, for the reasons mentioned above. (Currently, U.S. stocks make up about 15% of our Global Fund. Our focus instead is on better valued European and Asian companies.)

We’ve never been inclined to build portfolios that resemble an index. Far from it. The current disproportionate composition of the global index helps emphasize why.