From 1971 to 1989, international stocks significantly outperformed the S&P 500 Index, in U.S. dollar
terms. However, from 1989 to 2002 the S&P 500 was much stronger. Since 2002 international stocks have
regained the advantage. Over the entire period, the returns of both groups have been very close, with
domestic stocks slightly more profitable and slightly less volatile.
Most mutual funds that invest abroad do not attempt to hedge their exposure to foreign currency risk.
As a result, even if a foreign stock market stays flat in terms of its local currency, investors from
the U.S. can profit if the dollar falls.
Since January 2002, the U.S. dollar has lost 30 percent its value, during which time the average
international equity mutual fund has gained almost 29 percent while the total return on the S&P 500
was 10.3 percent. Therefore, most of the recent advantage of international equity mutual funds has
come from weakness in the dollar rather than from strength in the world’s major stock markets.
A bet on continued strength in the foreign sector implicitly assumes that the dollar will not rebound
significantly from current levels. However, the dollar