Ever wonder why international markets perform differently from the U.S. (and each other)? Just look at the sectors.

People talk a lot about the interaction between the political economy of nation states and the performance of their markets. And it is certainly true that different countries are often at different points in the economic cycle. That's one of the reasons why diversifying overseas adds low-correlated returns to a portfolio.

But there's another reason for those differences: sectors. The sector breakdowns between regions and countries differ widely, and examining those breakdowns can help you understand why one market zigs while another market zags.

Of course, the tail wags the dog here: The sector breakdown is reflective of each region's economy, and vice versa. But sectors offer one easy way to gain insight into how and why one economy and market performs differently from another.

U.S. Vs. The Developed World 0

If you compare the U.S. with international developed markets, for instance, you see stark differences in the sector front. The table below compares the sector breakdowns as of 10/07/08 for the S&P 500 SPDR ETF (AMEX: SPY) and the SPDR S&P World ex-US ETF (AMEX: GWL). It is ranked based on how overweight the developed international markets are vs. the S&P 500.

Interesting, huh? Financials make up more than one-quarter of the developed international markets, compared with less than 15% here at home. Materials are also significantly overweighted abroad. Meanwhile, U.S. markets are more heavily weighted to Information Technology, Consumer Staples, Health Care and Energy.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

It doesn't take much to see why those two markets may diverge over the coming weeks and months.

U.S. vs. Europe

If we drill down inside developed markets, we find that there is a large difference between the two poles of that market: Europe and Japan.

If you compare SPY with the iShares S&P Europe 350 Index Fund (NYSEArca: IEV), you get an interesting contrast. The biggest difference between this and the developed markets comparison lies in Information Technology. Based on this ETF, Europe has virtually no allocation to Information Technology.

Things change fairly radically when you turn to Japan. For this, I used the SPDR Russell/NOMURA PRIME Japan ETF (AMEX: JPP). In Japan, the overweight allocation to Financials falls, but the allocations to Consumer Discretionary and Industrial stocks skyrocket. On the flip side, the market is heavily underweight Energy, Health Care and Consumer Staples.

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