The American Liquidity Advantage

US stocks are much more liquid—and much more expensive

It’s an election year, so we’re hearing lots of scare stories about the decline of the United States of America. Pessimism and critique are in vogue as politicians jostle to make themselves seem important.

But there’s one era in which American supremacy is unquestionable: equity markets. America rules the market. Investors worldwide have a strong preference for US equity markets over international markets. As we’ve written about before, the vast majority of passive equity assets are allocated to US equity index funds.

Unsurprisingly, therefore, US equities have significantly higher liquidity than international equities. The below chart shows the average daily dollar value traded per dollar of market cap for US equities versus international equities on a market cap–weighted basis.

Figure 1: Market Cap–Weighted Average Daily Turnover (Daily Turnover / Market Cap)

Source: Capital IQ, Verdad

US equities are more than 2x as liquid per dollar of market cap as stocks outside of the US. This is a striking difference.

Investors, however, pay a price for this liquidity. The below chart shows EV/sales ratios for US versus international equities on a market cap–weighted basis.

Figure 2: Market Cap–Weighted EV/Sales

Source: Capital IQ, Verdad

The US trades at almost a 2x premium to the rest of the world on EV/sales. And we see an even more dramatic story on price-to-book multiples, which we show below.

Figure 3: Market Cap–Weighted P/B

Source: Capital IQ, Verdad

US price-to-book ratios are almost 4x international companies.

The US is the unquestionable king of equity market liquidity, but it’s also a dramatically more expensive market than less liquid international stock exchanges. Could investors be overpaying for this liquidity? And could those willing to invest in less liquid markets earn a premium by virtue of the illiquidity discount they pay when buying these stocks? Only time will tell.