E.g. if you are buying some US pharmaceutical index fund you are buying a passive product but are actually making two very active bets: you asume that pharmaceutical industry will outperform other sectors and that US pharmaceutical firms will do better than the rest of the world.
Could be betting that the US pharmaceutical won't go the same way at the same time than the US tech sector, where you have other investments. Could be that's it's one of the only 10 funds you have access to.
Indeed. Come over to /r/leanfire or even /r/financialindependence, most of us just want to have stable 'average' returns via funds like VTSAX so that we might retire as soon as possible without betting the farm.
A "entire stock market index fund" (which one?) has a methodology for weighting the funds and the markets it invests in. Most funds today weigh their selection by market capitalization. A other weigthing method, such as considering country GDP, might deliver superior results.
Also such "entire stock market index funds" usually only include large cap stocks -- small or micro cap stocks may or may not deliver better results.
Also such "entire stock market index funds" often will exclude entire countries. E.g. the very popular MSCI World and MSCI Emerging Markets funds contain 0 stocks from Ukraine but last year Ukraine had the best performing stock market worldwide.
Why?
Non-US countries usually don’t have diverse stock indexes. You’ll have their big telecoms, their big banks and a few other industries. A lot of their big industries will be owned by multinationals anyway, and the smaller ones are private.
The US large caps provide tons of international diversification, with a lot less paperwork and withholding taxes.
Google, Apple, Facebook, McDo’s, any oil company, etc. have large amounts of foreign revenue/branches, even in countries without a stock market that you could buy on.
If anything, US investors have too much international diversification when they buy US large cap indicies.
If the US economy does well but the rest doesn’t, US stock market returns will be poor.