As of 2020, global external assets exceed 200% of world GDP (Lane and Milesi-Ferretti 2018), with many countries building up significant capital stocks abroad. Given the scale of these external assets, even small differences in rates of return can have substantial implications for wealth accumulation and international wealth transfers.
However, despite a large body of work on current account imbalances, external adjustments and valuation effects (see Gourinchas and Rey 2014), little is known about the ‘foreign returns of nations’. While prior research emphasises return differentials between foreign assets and liabilities, such as the US ‘exorbitant privilege’ (Gourinchas and Rey 2007), systematic cross-country comparisons of asset returns are missing.
In this column, we compute and compare foreign investment returns across 13 advanced economies over almost 50 years, drawing on our recent research (Hünnekes et al. 2025). Our findings reveal substantial cross-country differences in foreign investment returns — up to four percentage points per year — that persist over time, between 1975 and 2023.
These large differences in returns by country are puzzling. In principle, international investing is a level playing field. Every country should have access to the same investment opportunities. Why do some countries earn much higher returns on their foreign assets than others? Why do equity investors from Germany or Spain persistently underperform those from Japan or Sweden?
To illustrate, we can focus on Germany, which has one of the largest net international investment positions due to sustained current account surpluses. In counterfactual scenarios, we estimate Germany would have gained an additional €4 to €4.5 trillion of wealth over the past decade, had its foreign investments performed like those of the US or Canada, respectively. Lastly, we narrow down potential drivers behind the poor performance of Germany’s foreign investments.
The ‘foreign returns of nations’ dataset
Our aim was to create and publicly share (download here) the most comprehensive database on international investment returns that is comparable and consistent across countries. To alleviate concerns about data quality and comparability, we start in 1970 when international balance of payments data start to be harmonised. We also build on previous high-quality work and data (Lane and Milesi-Ferretti 2007b), as well as statistics by the IMF and Bundesbank, and carefully check and clean sub-components of the return series.
We compute the aggregate nominal return on foreign assets following the standard approach in the literature (e.g. Habib 2010a, 2010b, Lane and Milesi-Ferretti 2003, 2007a), as the sum of investment income and aggregate valuation changes over the stock of assets at the beginning of each year. We focus on domestic currency returns (e.g. Rogoff and Tashiro 2015) and carefully verify the robustness of our estimates to stock-flow discrepancies and other measurement issues (e.g. Curcuru et al. 2008).
Beyond the 13 advanced economies considered in Hünnekes et al. (2025), the full dataset includes 157 countries which report to the IMF’s Balance of Payments and International Investment Position (BOP/IIP) Statistics. We compute separate returns for the four main investment categories: foreign direct investment, portfolio investment (debt and equity), other investments and reserves.
Foreign returns in international comparison
Figure 1 summarises one of the main findings of the paper. The figure ranks 13 advanced economies, for which we have sufficiently detailed data, by their annual average return on foreign assets (nominal and expressed in domestic currency) between 1975 and 2023. We see substantial differences across countries in terms of their foreign investment performance. For instance, the average nominal return of Finland and Portugal is only half that of the US. Among the largest economies, Germany has by far the lowest average rate of return at 4.8%, two percentage points below the next G7 country (France).
Figure 1 also shows real returns over the same period. Taking national inflation dynamics into account alters the ranking, but there remain sizable return differentials across countries. For instance, inflation-adjusted returns in Spain or Finland are more than four percentage points lower than those of the US or Denmark.
Figure 1 Average returns across countries, 1975-2023
Notes: The outer bars correspond to average nominal returns on foreign assets between 1975-2023, ranked by country. Inner bars refer to average real returns, deflated using national consumer prices. Data for Denmark and Portugal starts in 1981 and 1993, respectively. No data are available for Japan.
Figure 2 further compares the average (nominal) rates of return across the G7 economies over time, computed over a rolling five-year window. Over close to half a century, the nominal returns of Canada, the UK, and US have consistently been higher than those of France, Italy, or Germany, especially in the period after 2000. Conversely, Germany’s returns underperformed those of other nations, also compared to European countries.
Figure 2 Nominal return comparison, five-year rolling means, 1975-2023
Notes: Five-year rolling window average return on foreign assets for G7 member countries (excluding Japan due to data availability), plotted at the third year of the window. We compare nominal domestic currency returns to abstract from the effects of different inflation dynamics across countries.
To illustrate the cumulative size of these return differences, Figure 3 compares the total return on foreign assets across countries. The exercise considers an initial investment of one domestic currency unit in global capital markets in 1975, reinvesting any dividends or interest payments. As of 2023, the initial investment would be worth 47 to 85 times more under the investment strategy of the UK, US, or Canada. In contrast, the initial investment would have increased only by a factor of eight under Germany’s investment strategy.
These differences are substantial in economic terms: A simple back-of-the-envelope calculation that computes the value of forgone income based on return differentials shows that Germany would have gained an additional €4 trillion of wealth — equivalent to almost 120% of German GDP in 2020 — had its foreign investments performed like those of the US over the last decade (2009-2020). As an additional counterfactual exercise, we assume that all of Germany’s equity investments had been placed in a MSCI World index-tracking fund. Under this passive investment strategy, Germany would have gained €6.5 trillion more over the same period (more than 190% of GDP). These hypothetical numbers illustrate how consequential good (or bad) investment performance can be for aggregate wealth accumulation.
Figure 3 Cumulated nominal returns, 1975-2023
Notes: Cumulated total returns on foreign assets since 1975 for a portfolio with an initial value of one for G7 member countries (excluding Japan due to data availability).
What can explain the observed return differences?
So far, we have established that returns on foreign investments differ substantially across countries. Given that we compare a group of advanced economies with similar investment opportunities, the clear question is: what can explain the observed return differences? Focusing on Germany — a major exporter of savings to the rest of the world — we assess potential explanations but emphasise the need for future research to shed more light on the drivers of differences in investment performance.
First, we rule out that Germany’s external asset composition differs substantially from the remaining countries in the sample, e.g. due to differences in risk aversion. Instead, Germany underperforms similar countries within asset classes — especially portfolio equity — earning significantly lower risk-adjusted excess returns according to a capital asset pricing model (CAPM). We confirm these results using a separate security-level dataset on international equity holdings by mutual funds.
Second, we find poor market timing by German mutual funds — many classified as following growth strategies — to be one driver of the underperformance. Specifically, the correlation of excess returns with the market factor in the CAPM is higher during periods of market downturns, which suggests an inability to time the market relative to mutual funds from other countries.
Third, we test whether German returns are the result of bad or biased financial advice. Retail investors in Germany rely heavily on advice from their main bank (e.g. BVI 2009) and frequently buy financial products offered by associated asset managers. According to our estimates, mutual funds managed by the largest German retail banks underperform their German peers, contributing to the poor overall performance of German equity investments abroad.
Concluding remarks
By computing rates of return on foreign investments, we document substantial differences across countries that persist over long periods of time and illustrate the economic importance of these differences for countries’ aggregate accumulation of wealth over time. The underlying drivers of differential returns remain a puzzle that requires further research. We hope the ‘foreign returns of nations’ dataset, which we introduce in this column, can provide a starting point for some of this future work.
Our results have important policy implications for countries like Germany. Investors and fund managers should be less ambitious in trying to beat the market when investing abroad, as aggregate foreign returns would have been substantially higher with a passive investment strategy. Similarly, retail investors would have performed better by investing in standard index-tracking funds instead of active mutual funds. Reducing information frictions and conflicts of interest in financial advice to retail clients could be one solution to encourage passive investments. Another option is the creation of a sovereign wealth or public pension fund with a long investment horizon that invests in a global market portfolio.
Authors note: This column reflects the views expressed are solely the responsibility of the authors and should not be interpreted as reflecting the views of the European Central Bank.
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