My friend Meb Faber recently solicited some new ETF suggestions from his readers. Now I am going to throw my idea into the ring. An ETF (or ETFs) that focus on companies that do business solely within their own borders.
Cormac Mullen and Jenny Berrill in the Financial Analysts Journal call these companies “mononationals.” What is the benefit of mononationals from a portfolio perspective? From the abstract of their paper entitled “Mononationals: The Diversification Benefits of Investing in Companies with No Foreign Sales“:
Few papers have focused on the diversification benefits of companies with domestic sales only, or mononationals. We compare the international diversification benefits of equity portfolios of various multinational classifications. We find that multinationality has a significant impact on diversification benefits, with foreign “domestic” stocks offering the most benefits and foreign “global” stocks the least, and that investing in stocks with low sales in the investor’s home region leads to higher benefits. For portfolio managers, we suggest that a portfolio of mononationals offers the potential for greater benefits than a portfolio of multinationals. Our results are strongest for US, eurozone, UK, and Japanese investors.
The bottom line is that multinationals muck up the diversification benefits of going overseas. For example in the S&P 500 there are 113 companies that generate more than 50% of their sales from overseas. More focused country funds would allow investors to better target global opportunities. Since most analysts continue to call for continued international stock outperformance this seems like a good business opportunity for an enterprising ETF sponsor.
In the words of Maui, “You’re welcome.”