Is investing in US-specific funds a smart move?

Year 2019 and 2020 were among the most profitable for foreign funds, particularly those domiciled in the United States. In this post, we'll go through US funds again to see if they're still worth your money.

While investing in international or global funds, many individuals are still unsure what these terms truly represent. Generally, they believe that investing in the S&P 500 or the NASDAQ 100 will provide them with adequate foreign exposure. That, however, is not the case. A real international fund invests your money in businesses from the United States, United Kingdom, China, Australia, Canada, Japan, and other countries throughout the world.

However, only a few funds sensibly invest internationally. The majority of them are country-specific or worldwide in scope but focus on a certain theme or sector. There are nearly nine funds out of 39 that are solely dedicated to US stocks, while only seven are genuinely global. 

The average three-year (calendar year) return of US-based funds is 28.92 per cent, while the return of global funds is 20 per cent. FAANG is the major reason why US-based funds have fared so well (Facebook, Apple, Amazon, Netflix and Google). Mirae Asset, in fact, has formed a fund dedicated just to FAANG. Though such a focused portfolio has a significant potential for better returns (as can be seen in the above graph), it also has a higher risk profile.  

As you can see, when it comes to risk, as defined by standard deviation, global funds that are widely diversified have lower risk than US-specific funds. However, in terms of risk-adjusted returns, the US-specific fund performed better.

So, is it worthwhile to invest in US-focused funds right now? The consumer price index (CPI) in the United States increased to 7 per cent in December 2021. The US Federal Reserve Federal Open Market Committee (FOMC) will convene on January 25 and 26, 2022. With growing inflation, it is believed that they may contemplate raising interest rates sooner than planned. In the United States, 86 per cent of traders dealing in interest rate futures forecast a rate rise in March. 

There has been a surge in the stock market during the last year and a half, which is mostly due to the injected liquidity by central banks throughout the world. However, when liquidity is withdrawn and interest rates begin to rise, volatility is likely to persist. As a result, at this time, it makes perfect sense to have a well-diversified portfolio and, rather than investing in US-specific funds, aim to invest in true international funds or just reduce your allocation to US-specific funds.