Investors typically assume that an investment in standard regional equity indices that select companies according to their country of domicile will provide them with adequate exposure to the targeted region. Far from it. Companies based in the Eurozone, for example, generate, on average, only about 56% of their revenue within the Eurozone. The rest is generated in other parts of the world. Japanese companies, on the other hand, do display a significantly higher “home bias” and generate, on average, about 74% of their revenue within Japan’s borders. Consequently, Japanese companies depend on the characteristics and conditions of the local market, while Eurozone-based companies largely depend on conditions in foreign markets.

By identifying and explicitly measuring each company’s regional source of revenue, STOXX International Exposure Indices enable investors to control for and make use of targeted exposures.

In this context, STOXX International Exposure Indices tilt the regional revenue exposure to achieve a more diversified, i.e. more international character. Both, the EURO STOXX International Exposure Index as well as the STOXX Japan International Exposure Index select only those companies that generate at least 50% of their revenue outside of the respective home region.

This approach is found to achieve two effects. First, the selected companies are less dependent on the respective local region. i.e., in times of local crises, companies with a high foreign revenue exposure are geographically more diversified and consequently less prone to local market conditions.

Second, and this partly follows from the first observation, both indices are found to provide an implicit hedge against a depreciation of the respective local currency. In other words, the outperformance of both STOXX International Exposure Indices relative to the respective standard equity benchmark is found to be negatively related to the value of the local currency. When the local currency depreciates, e.g. relative to the US dollar, STOXX International Exposure Indices tend to outperform their benchmarks and vice versa.

This paper puts the STOXX International Exposure Indices in a broader context by analyzing revenue exposure characteristics of two underlying equity markets: Eurozone and Japan. Implications of revenue tilts on performance as well as on risk characteristics are discussed. Lastly, the relation between foreign revenue tilts and the value of the respective local currency is investigated.

Read: STOXX International Exposure Indices - Gaining International Exposure via local investing