Can international diversification benefits be accessed in a tax-efficient way?

The U.S. equity market has a concentration problem: more than 50% of S&P 500 market capitalization across both growth and value styles is tied to artificial intelligence in some capacity. With AI adoption still in early innings and earnings expectations elevated, the market is increasingly vulnerable to shocks. The Federal Reserve's recent pivot may further aggravate this risk: as capital-intensive, long-duration investments, equities across the AI value chain can be particularly sensitive to changes in interest rates.

AI concentration extends beyond U.S. public equity. Private markets lean heavily into the buildout, from data centers and power plants to large language model labs; and as capex needs grow, more debt is being issued in both public and private markets to bridge the gap between spending and cash flow.

Truly diversifying assets have therefore become more elusive - but they exist. Developed equity markets outside the U.S. are significantly less concentrated: Europe and Japan's largest stocks represent a smaller share of market capitalization, while "old world" industrial, financial and energy companies play a larger role. These markets have also benefited from structural shifts, including improved bank profitability and increased defense spending alongside fiscal expansion.

Rebalancing, however, can be challenging. Decades of U.S. equity outperformance have left many investors with large embedded capital gains, meaning selling U.S. assets to fund international allocations can trigger a significant tax bill. As we've previously discussed, active tax management through tax-loss harvesting and tax-smart transitions can therefore be an important element of portfolio construction.

The ability to access active tax management on a wider set of stocks than just the U.S. large cap market offers an often-overlooked opportunity to enhance a portfolio on an after-tax basis, too. Across J.P. Morgan Asset Management’s Tax Smart SMA platform, which encompasses 33,000+ individual accounts and nearly $78bn in assets (as of September 25, 2026), 92% of index-tracking accounts (and 95% of index-tracking assets) target U.S. equity indexes.¹

Yet in our research, opportunities for active tax management across international stocks are comparable to what is observed for U.S. stocks. As of August 31, 2026, the S&P 500 index was up around 12% on a year-to-date basis, with roughly 70% of index constituents having experienced a 5% drawdown at some point through the year. Over this same period, the MSCI ACWI ex-U.S. ADR Index, which has 619 constituents² and was up roughly 13% on a year-to-date basis, had 64% of its constituents experiencing the same magnitude of drawdown.

Whether investors are looking to access international markets on a stand-alone basis or as part of a custom index, this opportunity for active tax management can offer benefits for investors looking to diversify existing assets or generate ongoing losses to offset gains.

¹ 83% of accounts and 87% of assets track the S&P 500 index alone

² Representing an ADR only subset of the broader MSCI ACWI ex US index, which had 1,933 constituents but is more difficult to access for U.S. clients in separately managed accounts at account sizes of ~$250k.

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