US vs Europe Stock Investing

US Stock Funds or Europe Stock Funds? Which is Better?

Which is better - US stocks or Europe stocks?. Getty Images

The United States is no doubt the strongest economy in the world and European countries combine to form what can be considered the oldest economy in the world.

Which is better -- US stock funds or Europe stock funds? Is it smart to own both?

Europe Stock is a subcategory of International Stock that generally refers to portfolios that invest in the European region's larger and more developed markets, such as Great Britain, Germany, France, Switzerland, and the Netherlands.

Today, global economies, especially the developed markets, are interrelated and stock prices in major market indices around the world are generally correlated. For example, it is not common in the modern global environment for the US or Europe to have a significant market correction or sustained decline while the other is enjoying a bull market.

US Stock Index vs Europe Stock Index Historic Performance

The past is no guarantee of future results but if we look at a long-term period, such as 10 years or more, history can provide some hints about what to expect in the future.

To compare performance we can use index funds -- Vanguard 500 Index (VFINX) to represents US stocks and Vanguard European Stock Index (VEURX) to represent Europe stocks. This historical perspective is based upon returns for the 10-year period between the June 1, 2005 and May 31, 2015:

  • 10-year annualized return US stocks: 8.00%
  • 10-year annualized return Europe stocks: 5.70%
  • Average US large-cap stock expense ratio: 1.10%
  • Average Europe Stock expense ratio: 1.50%
  • Best Return (Year) US stocks: 32% (2013)
  • Worst Return (Year) US stocks: -37% (2008)
  • Best Return (Year) Europe stocks: 33.4% (2006)
  • Worst Return (Year) Europe stocks: -44.7% (2008)

    Key takeaways from the above information is that the US stocks have average higher annualized returns and lower average expenses than Europe stocks. Europe stocks have the highest best return but the lowest worst return, which indicates greater volatility (and higher implied market risk).

    Also, the worst years for both US and Europe stock markets were in 2008. This indicates a correlation in returns, which further indicates relatively low diversification.

    Bottom Line: If the future is similar to the recent past, Europe stocks will produce inferior returns to US stocks and at a higher level of risk. Therefore the reward does not justify the risk and an investor may be better off using US stocks and diversifying with other investment types, such as bond funds or sector funds with low correlation to the S&P 500.

    Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.