Source: CapitalCube ETFs
We’re seeing increased investor interest around international ETFs lately, even as the U.S. markets keep hitting fresh all-time highs. Big name countries have got the headlights shining down on them, illuminating both their promise and their warts.
While everyone is off fretting about China, Brazil, and Russia, Europe is quietly putting up a good year with 5%+ returns so far. India is on a tear, the lone redeemer out of a BRIC group that has left a bitter taste in many investors’ mouths the past five years. After being touted as the next hot investment space for a decade, it turned out that owning a BRIC fund was almost as bad as holding cash these past few years.
The last 5 years haven’t exactly been the poster child for investing anywhere overseas. The MSCI All Country World Index (which includes over 40% exposure to the U.S.) returned an average of about 11.5% since 2009. Take the U.S. (and its 5 year doubling of the stock market) out of the picture, and that average return drops nearly four full percentage points.
We’ve also seen quite a bit of news come out of the land of so-called “frontier economies”, those that aren’t quite established enough to be in with the emerging market group…and as such they come with increased risks. We noted here recently the investor interest in new funds for Qatar and the United Arab Emirates, on the heels of the two nations being bumped up to ‘emerging market’ status by indexing Goliath MSCI. It’s totally fair that these two fast-growing economies will be opened up to a large new group of investors by entering the emerging markets category. They are both expected to grow GDP by 20% in the next three years.
Investors have been tripping over themselves to get into Qatar and UAE equities ahead of the indexing change, but it remains to be seen how well the frontier market ETFs perform with two of their strongest constituents out the door. And while frontier market funds have been grabbing headlines lately for their strong gains, over a five year period they’ve massively underperformed the MSCI World index.
My suggestion is to avoid funds like the iShares MSCI Frontier 100 ETF (NYSE Arca: FM) until we see new countries step up with strong growth and reforms. A good option would be the WisdomTree Middle East Dividend Fund (NASDAQ: GULF), which will keep its exposure to Qatar and UAE, while also investing in places like Egypt, Kuwait, and Morocco as shown here:
India: Front and Center
No discussion of international hot spots is complete without mentioning India, where the prospects for pro-business reforms along with a new ruling party have pushed the Sensex up over 17% this year. GDP is expected to come in above 5% for the year, and the largest India-focused ETF, the WisdomTree India Earnings Fund (NYSE Arca: EPI) is scorching along with a 32% return in the last year, while paying a 1.40% yield.
The EPI tracks a fundamentally-weighted index that takes into account a company’s net income when determining position sizes, which is why EPI has outperformed the MSCI India Index in the past couple of years. CapitalCube’s advanced metrics show that a large percentage of the EPI’s holdings have above-average fundamental scores.
I think a bottom-up focus by outside investors on Indian company fundamentals will drive the Sensex higher, and set up the EPI to keep outperforming. The fund has a reasonable expense ratio (given its international nature) of 0.84% , but it also has a high allocation towards financial stocks:
So if you’re already well allocated to financial stocks with your U.S. investments, you may want to go with a fund like the PowerShares India Portfolio (NYSE Arca: PIN), which has a less than 10% in financials, and a similar performance profile to the EPI.
A Pacific Play – “Ex” the Big Boys
My last hot spot for today keeps us in Asia, where I’m attracted to the Australia/Hong Kong/Singapore region. They are strong, stable economies not named China or Japan, which I like, and good exposure is offered through the iShares MSCI Pacific ex-Japan Fund (NYSE Arca: EPP). It has been a strong performer over the past five years, and is up over 9% this year. I’m wary of China in the near-term, despite the fact that they’re still clocking in better GDP growth than nearly anyone on the planet; analysts have been systematically cutting China GDP estimates this year, and China-focused funds are down in 2014 because of this. Japan, meanwhile, is dealing with massive structural problems in its economy and demographics, and I see no reason to park money there right now.
The MSCI indexes show how much better Asia is doing without the two countries included. The MSCI All Country Pacific index has produced an average return just above 6% per year since 2009. Take Japan out of the mix and the average annual return jumps to almost 9%. The MSCI China index has produced puny 2% average returns since 2009, while the Singapore index has averaged over 8%.
A little further down the Pacific pond, the MSCI Australia Index has cranked out impressive 9% average returns over the past five years, which is especially respectable considering how leveraged the country is to higher commodity prices, which we haven’t seen for quite some time. Australia is a world top-5 exporter of coal, iron ore, gold, nickel, bauxite, silver, copper, and many other hard commodities. I think it’s a good strategy for investors to seek out some extra exposure to companies and countries that will profit from rising commodity prices, which makes Australia one of my favorite geographical picks. And the iShares family offers a low expense ratio, just 0.5% for the EPP. The fund’s volatility is much lower than its peers, a metric I look closely at when evaluating the riskier world of international stocks. Perhaps most importantly, the constituent stocks of EPP rank higher than their peers according to CapitalCube’s advanced fundamental metric:
A Word on Picking Battles
Creating – and maintaining – an opportunistic, balanced portfolio means getting some international exposure. But unless you have deep, specific knowledge that has you feeling up to the task of evaluating individual overseas stocks, it’s better to just farm out that part of your financial planning. Drop the anchor of your international exposure into a broad fund like the iShares MSCI Emerging Markets ETF (NYSE Arca:EEM), then look for opportunities in hot spots like the ones discussed today. For my own money, I make my country and region bets infrequently, then make changes based on the hard numbers of local GDP growth and foreign stock index valuation.
The views and opinions expressed above are those of the author and do not necessarily reflect the views of CapitalCube.com, AnalytixInsight, Inc., its affiliates, or its employees.
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