Beyond the US: Why Now Is the Time to Diversify Globally

For the past decade, U.S. shares have been the star of the global equity market. With an average 12-month return of over 15% in the S&P 500, they’ve outpaced the UK, Japan, Canada, and Europe by a wide margin. Much of that success was built on the strength of U.S. tech giants, leaner balance sheets, and the deep liquidity of markets like the NYSE and Nasdaq.

But here’s the thing: the factors behind that dominance may not last forever. U.S. valuations are now stretched, policy uncertainty is rising, and international markets are regaining their footing. For Kiwi investors, that makes diversification more important than ever.

The tailwinds that pushed U.S. equities to record highs, cheap money, favourable regulation, and globalised business models are fading. Interest rates are higher, trade tensions are making supply chains messy, and not every AI investment is translating into earnings. Geopolitical risks add another layer of uncertainty.

Meanwhile, markets outside the U.S. are showing strength. In 2025 alone, the UK (+13.4%), Europe ex-UK (+10.4%) and Canada (+11.8%) have outperformed the S&P 500 (+8.6%). This isn’t a one-off blip, but part of a trend towards more balanced global performance.

It’s not just about returns, it’s about reducing concentration risk. Global indices like MSCI World or S&P World are heavily skewed to the U.S., with more than 70% of their weight in American companies. That means even when you think you’re globally diversified, you may still be mainly exposed to U.S. market fortunes.

That’s where the Kernel World ex-U.S. Fund comes in. Instead of leaning heavily on one market, it spreads investments across around 1,000 companies in Japan, the UK, Canada, Europe, and beyond. Available in both hedged and unhedged NZD options, it’s designed to give real global exposure, without the U.S. tilt.

Adding ex-U.S. exposure isn’t just about spreading your bets, it’s about how the markets move relative to each other. Historically, U.S. and Canadian markets move almost in lockstep (often above 0.8 correlation), but correlations between the U.S. and Europe, UK, and especially Japan are much lower.

That’s good news for diversification. Lower correlations mean that when U.S. markets stumble, other regions may behave differently giving portfolios resilience. Notably, since COVID-19, correlations between the U.S. and other developed markets have fallen to their lowest levels in decades, opening fresh opportunities for diversification.

There’s also a sector story. U.S. and world indices are dominated by technology more than 30% in some cases. By contrast, the World ex-U.S. Index is more evenly spread across sectors like Industrials (18.5%), Financials (24.8%), and Consumer Discretionary (9.4%). Adding this balance helps investors avoid the risks of being overexposed to one or two sectors driving returns.

Global equity markets in 2025 have reinforced the benefits of diversification, as regional performance divergences continue to shape returns. While the S&P 500 led long-term five-year gains at 14.6% annually, it has lagged peers year-to-date, delivering only 8.6% between December 2024 and July 2025. Markets in the UK, Europe ex-UK, and Canada outpaced the US, supported by local resilience and structural improvements abroad, with returns of 13.4%, 10.4%, and 11.8% respectively.

The flare-up in trade tensions in April 2025 highlighted market vulnerabilities, with US equities sliding nearly 5% under tariff pressures and policy uncertainty, while European and Canadian markets remained more resilient. These events demonstrate how non-US equities can provide ballast during US downturns, making the case for allocating capital across regions and sectors stronger than ever.

Beyond short-term performance, the S&P World ex-US index underscores the long-run advantages of diversification, offering lower volatility and often stronger risk-adjusted returns compared to a US-only approach. Over the past year, it outperformed the S&P 500 on both return (15.1% vs. 13.3%) and volatility (11.2% vs. 19.1%), producing a much more favourable Sharpe ratio. This pattern persists across three-, five-, and ten-year horizons, where ex-US equities consistently provided smoother returns, despite the S&P 500’s higher absolute gains over longer periods.

Global diversification enhances resilience during periods of heightened uncertainty and sector concentration risk in the US market. The result is a more resilient portfolio, better positioned to deliver consistent and balanced growth for investors.

The Kernel World ex-US Fund offers a flexible solution for New Zealand investors looking to fine-tune global equity exposure.

For those building a portfolio from the ground up, it can be strategically paired with an S&P 500 fund, allowing for a conscious decision on the desired balance between the U.S. market and the rest of the developed world, rather than simply accepting a market-cap-weighted allocation.

Alternatively, for portfolios already holding a broad market-cap-weighted global fund that may have a significant U.S. bias, the Kernel World ex-US Fund provides a straightforward way to reduce that concentration. By replacing a portion of an existing global fund allocation with this ex-U.S. option, a more diversified and intentionally balanced portfolio can be achieved, better positioned for evolving global market dynamics.