Most conversations about U.S. versus international equity performance focus on asset allocation: how much do you have in each bucket? But that framing misses something important. Through a factor lens, home bias is a risk exposure that cuts across asset classes in ways that traditional portfolio construction doesn't capture. And right now, that distinction matters more than it has in years.
In the 10 years leading up to the recent U.S. presidential inauguration, the iShares Core S&P 500 ETF (IVV) outperformed the iShares MSCI EAFE ETF (EFA) by 8% per year on average, a meaningful tailwind for the many U.S. investors who exhibited home bias, or the tendency to overweight domestic equity markets.
That tailwind has recently reversed. Since inauguration day on January 20, 2025 through 3/18/2026, IVV has underperformed EFA by an annualized 15.1% as U.S. tariff policy has fueled concerns about domestic growth and U.S. isolationism.
Among the factors on Venn's shortlist for measuring institutional portfolio risk is our Local Equity factor, which is specifically designed to isolate and quantify the effect of home bias, a particularly useful tool in today’s environment. In this piece, we review how it is constructed, how it has performed, and how it can be applied in a total portfolio approach.
Isolating U.S.-specific equity market risk can be difficult when it is entangled with global equities. To address this, our Local Equity factor first removes the risk correlated with our Equity factor, resulting in a measure that aims to capture pure exposure to home bias. In essence, it quantifies the effect of being overweight the U.S. equity market
Importantly, Venn measures exposure to this factor across all asset classes using return patterns alone. This means an asset with no equities whatsoever can still carry meaningful correlation to this risk, and its measured exposure may differ significantly from what asset allocation alone would suggest. This is central to what a total portfolio approach is about: thinking in terms of risk, not just asset classes.
We can observe performance of our Local Equity factor on a standalone basis, where interpretation is straightforward: when it's positive, U.S.-specific market risk is being rewarded; when it's negative, it isn't.
Exhibit 1: Rolling 3-Year Return of Venn’s Local Equity Factor
Source: Venn
While our Local Equity factor did experience meaningful negative returns early in its history, it has delivered positive returns in nearly all rolling 3-year periods over the past 15 years. But as the chart makes clear, that trend has reversed sharply, with the most recent reading falling below zero.
Looking back five years or so reveals an observation that isn't making headlines: the benefits of U.S. home bias have been trending downward since 2020, with recent U.S. policy accelerating that decline. Notably, the trend predates the current administration by several years, raising the question of whether this reflects a more durable structural shift rather than a short-term reversal.
For allocators, this means exposure to overweighting U.S. securities, as measured by Venn’s Local Equity factor, has been providing progressively less positive relative return and has now become a headwind. This is a critical input for understanding past performance and framing future portfolio conversations. But those return patterns have only mattered to the extent that a given portfolio was actually exposed to this risk. So the natural next question is: how much exposure does your portfolio have?
Below we show a hypothetical multi-asset portfolio's total exposure to our Local Equity factor, which is 0.26. This means that, all else equal, if our Local Equity factor declined 1%, this portfolio would be expected to decline 0.26%.
Exhibit 2: Local Equity Factor Exposure of a Hypothetical Multi-Asset Portfolio
The two largest contributors to this portfolio's home bias exposure are both equity-oriented. A REIT fund contributed 69.23%, with a Local Equity beta of 1.12, the highest in the portfolio and consistent with the view that real estate securities tend to be highly sensitive to the domestic economy. Close behind, a U.S. large cap value fund contributed 57.47%, reflecting its concentrated exposure to domestic equities.
On the other end of the spectrum, an international equity manager carried a Local Equity beta of -0.71, as would be expected given its focus on non-U.S. markets. In relative performance terms, this manager would be expected to benefit when U.S. equities underperform, and accordingly, its place in the portfolio reduces the portfolio's total Local Equity factor exposure by 43.56%.
Perhaps more surprising: managers with no direct long-only equity mandate are also contributing to positive home bias risk. A long/short equity manager contributed 14.96% to total Local Equity exposure, and even a high yield bond ETF contributed 8.05%. For investors looking to understand their true risk profile, fine-tune their exposures, or simply explain recent performance, looking at asset allocation weights alone may not get you there.
Venn's decision to include a Local Equity factor predates current events. It’s a part of our factor lens because of its demonstrated importance across typical institutional portfolios, not as a reaction to today's headlines. That said, the recent deterioration in its performance makes it a particularly timely lens through which to examine portfolio risk.
As we've shown, measuring home bias through asset allocation alone is insufficient. Different equity types carry different levels of sensitivity, and any manager — alternative, fixed income, or otherwise — can contribute to home bias at the total portfolio level. And because Venn measures this exposure only through return patterns, it can even identify it for hedge funds with no holdings transparency. The result is a complete picture of home bias risk across the entire portfolio.
For allocators, that level of precision changes what's possible. Understanding exactly where home bias risk lives in a portfolio, and how much, is the starting point for sharper performance attribution, more informed portfolio construction, and more confident client conversations. The current environment has made conversations surrounding U.S. home bias more urgent. Factor analysis, and specifically Venn’s Local Equity factor, is one way to enable having them.
Exposure to risk factors is not a guarantee of increased performance or decreased risk.
References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.
This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.