It’s reasonable for U.S. investors to focus on domestic stocks like the S&P 500 — that’s where the action has been. But ETF investors are now starting to look overseas.
Investors poured more than $116 billion into international stock ETFs this year through May, says Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “International equity ETFs have returned to favor,” he says.
And it’s easy to understand why.
Some individual stocks overseas are starting to put up U.S.-topping returns. Three of the top 10 stocks this year in the S&P Global 1200 index, a collection of the world’s most valuable companies, hail from outside the U.S. And seven of the top 20 stocks in the index are based outside the U.S.
Now, it seems, investors want in.
International ETFs Start To Catch Up With The S&P 500
International stocks are closing the gap with their U.S. counterparts. The largest international ETF, the Vanguard FTSE Developed Markets ETF (VEA) is up 30.7% in the past 12 months, through June 23. That’s just slightly behind the SPDR S&P 500 ETF Trust’s 35.5% gain in that time.
And that’s just part of the story, says Lara Crigger, managing editor at ETFFlows.com. Dividends, too, are playing a role. Many European companies are not only reinstating their pre-pandemic dividends. They’re topping them in many cases. Many European ETFs focused on high dividends are “among the best performing international ETFs” this year, she says.
Take Invesco International Dividend Achievers (PID). The ETF owns roughly 50 high yielding stocks from around the world. And it, in turn, yields 2.91%. That’s roughly double the S&P 500’s 1.3% yield. That’s not missed by investors who pushed the ETF’s price up more than 15% this year. The S&P 500 is up just 13.1% in that time.
Commodity Boom Lifts Overseas Stocks
Soaring oil prices are certainly lifting many U.S. energy firm’s shares. The energy sector is the top performer in the S&P 500 this year. But strong commodity prices give an even larger lift to many international ETFs, Crigger said.
Energy is just roughly 2% of the S&P 500. But the sector is more than 14% of the iShares MSCI Canada ETF (EWC). The Canadian ETF holds another 10.7% in materials. “Canada is a big commodity producer in oil, metals, raw materials,” Crigger said. The Canadian ETF is up more than 20% this year.
It’s a similar story with emerging markets, just less so. The iShares Core MSCI Emerging Markets ETF (IEMG) holds more than 4% of its portfolio in the energy sector. And it plows an additional 8.6% in materials. The ETF is only up 6.9% this year so far. But it’s up 36.5% in the past 12 months, edging out the Vanguard FTSE Developed Markets ETF in that time.
These ETFs’ positioning for global trends explain their popularity. The iShares Core MSCI Emerging Markets ETF and Vanguard FTSE Developed Markets ETFs together hauled in the “lion’s share” of money going into international ETFs this year, Rosenbluth says. More than $116 billion flowed into those two ETFs combined this year through May.
Investors Look To Amp Up Some International Exposure
Investors, too, are picking some of their favorite specific international spots as well, Rosenbluth says. Nearly $2 billion of new money moved into the five largest China ETFs this year, Rosenbluth says. That’s a strong commitment by investors as China already accounts for a third of assets in iShares Core MSCI Emerging Markets.
Money is flowing in despite China not paying off, yet. Shares of the largest China ETF, the iShares MSCI China ETF (MCHI), are down 0.3% this year. It’s also lagging the S&P 500 in the past 12 months, rising just 20.6% in that time period.
But how each country handles the vaccination rollout will drive returns in the near term, Crigger said. “Not all countries or regions are benefiting equally; and to a large extent, performance has a lot to do with how well individual countries and regions have handled the Covid-19 vaccination rollout,” she said.
Meanwhile, global exposure is worth the uncertainty. “International ETFs can make excellent core holdings, because they help diversify out the equity allocation, given that international equities are subject to supply and demand factors that are distinct from those impacting the U.S. markets,” she said.
Largest International ETFs
|ETF||Symbol||Assets ($ billions)||YTD % ch.||12-month ch.|
|Vanguard FTSE Developed Markets||(VEA)||$101.2||9.3%||30.7%|
|iShares Core MSCI EAFE||(IEFA)||96.6||8.6%||28.4%|
|iShares MSCI EAFE||(EFA)||57.3||8.3%||27.3%|
|Schwab International Equity||(SCHF)||27||9.7%||29.3%|
|iShares MSCI EAFE Value||(EFV)||14.5||10.4%||27.2%|
|iShares MSCI EAFE Small-Cap||(SCZ)||14||8.3%||34.9%|
|SPDR Portfolio Developed World ex-US||(SPDW)||11.5||9.3%||31.2%|
|iShares MSCI EAFE Growth||(EFG)||10.5||6.1%||26.7%|
|Vanguard FTSE All-World ex-US Small-Cap||(VSS)||9.5||11.6%||38.9%|
|iShares MSCI EAFE Min Vol Factor||(EFAV)||8.8||2.7%||12.3%|
Sources: ETFDB, IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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