Historically investors have added broad international exposure
to a stock portfolio to find higher returns and/or to lower
overall portfolio volatility. These reasons are as valid as ever
- and as dependent on market cycles.
A handful of solid, well-priced ETFs give broad exposure to
mostly large or mid-cap stocks in economies outside the US. The
most popular is iShares MSCI EAFE ETF (NYSEArca:EFA), which
tracks the widely followed Europe Australasia Far East Index of
advanced economies. Most other broad international funds include
small amounts of emerging markets. SPDR MSCI ACWI ex-US ETF
(NYSEArca:CWI) and iShares MSCI ACWI ex US ETF (NasdaqGM:ACWX)
both track about 45 countries in the Morgan Stanley All Country
World Index. SPDR S&P World ex-US ETF (NYSEArca:GWL) and
Vanguard FTSE All-World ex-US ETF (
VEU
) round out the group with similarly comprehensive coverage.
Year-to-date their performance is:
.gif)
All charge 0.35% in annual fees, except VEU which charges
0.25%. These are all about 0.15% above similarly broad US-only
funds, so even in a flat world there is a cost to moving capital.
Foreign brokerage firm involvement, paperwork, and currency
exchange account for much of it.
Seeking better returns elsewhere makes the most sense when one
and ideally several of the following are true: 1) Economic
prospects abroad appear better than in the US, 2) Valuations of
foreign stocks are cheaper than in the US, and 3) the dollar is
more likely than not to decline against a basket of other
currencies.
As to whether economic prospects abroad are higher, consensus
2010 gross domestic product projections show Asia leading (spread
widely between China's 9% and Japan's 2%) all regions. This is
followed by the US at about 2% growth in 2010 and then by Europe
at 1% growth. So in terms of economic prospects the US sits in
the middle of the pack. Price/Earnings valuations for Asian
stocks are a bit high (certainly in China), while valuations for
US and European valuations are close to historical averages.
Overall, it is an acceptable but not a terrific time to go
abroad.
The dollar's low value seems at first a reason to stay home.
The Yen and the Euro have climbed to impressive levels, giving
the dollar investor less purchasing power. In normal times, the
dollar would rebound as investors flock to invest on Wall St. or
as international buyers snap up cheap US goods, so all else being
equal, US stocks would be preferable. Unfortunately the US
government is embarked on an unprecedented spending spree while
the Federal Reserve is essentially printing money by buying up
vast amounts of Treasuries. Classical economics points eventually
to monetary inflation and further weakening of the dollar vs.
other currencies.
Portfolio diversification has long been a reason to put a
sizable chunk of money in international. Unfortunately,
researchers have been noting a steady rise in correlation between
US and most other countries' stock markets. The diversification
benefit appears to be melting away.
It is fashionable nowadays to say that international stocks
are moving in tandem for the first time, but that is not
historically accurate. There have been many periods of increasing
and decreasing correlation, going back more than a century. In
"Long-Term Global Market Correlations" from The Journal of
Business, 2006, authors William N. Goetzmann, Lingfeng Li, and K.
Geert Rouwenhorst found that:
"The correlation structure of the world equity markets varied
considerably over the past 150 years and was high during periods
of economic integration." Only now do we call it
globalization.
Of particular note is that correlation was found to be
strongest just when the investor least desires it: in times of
high volatility. On the brighter side, when volatility created by
the current crisis subsides as it surely will, correlation should
fade somewhat and the benefits of diversification should
re-emerge.
There are many other ETFs for playing international stocks in
various ways. The following ETFs make it easy to filter for
company size and growth/value characteristics:
- iShares MSCI EAFE Growth ETF (NYSEArca:EFG), annual fees:
0.4%
- iShares MSCI EAFE Small Cap ETF (NYSEArca:SCZ), annual
fees: 0.4%
- iShares MSCI EAFE Value ETF (NYSEArca:EFV), annual fees:
0.4%
- SPDR Dow Jones Global Titans ETF (NYSEArca:DGT), annual
fees: 0.5%
- iShares S&P Global 100 ETF (NYSEArca:IOO), annual
fees: 0.4%
- PowerShares BLDRS Developed Markets 100 ADR ETF
(NasdaqGM:ADRD), annual fees: 0.3%
- Vanguard FTSE All-World ex-US Small-Cap ETF
(NYSEArca:VSS), annual fees: 0.38%
- iShares MSCI EAFE Growth ETF (NYSEArca:EFG), annual fees:
0.4%
- iShares MSCI EAFE Small Cap ETF (NYSEArca:SCZ), annual
fees: 0.4%
- iShares MSCI EAFE Value ETF (NYSEArca:EFV), annual fees:
0.4%
- SPDR Dow Jones Global Titans ETF (NYSEArca:DGT), annual
fees: 0.5%
- iShares S&P Global 100 ETF (NYSEArca:IOO), annual fees:
0.4%
- PowerShares BLDRS Developed Markets 100 ADR ETF
(NasdaqGM:ADRD), annual fees: 0.3%
- Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEArca:VSS),
annual fees: 0.38%
iShares MSCI EAFE Growth ETF (NYSEArca:EFG), annual fees:
0.4%
iShares MSCI EAFE Small Cap ETF (NYSEArca:SCZ), annual fees:
0.4%
iShares MSCI EAFE Value ETF (NYSEArca:EFV), annual fees:
0.4%
SPDR Dow Jones Global Titans ETF (NYSEArca:DGT), annual fees:
0.5%
iShares S&P Global 100 ETF (NYSEArca:IOO), annual fees:
0.4%
PowerShares BLDRS Developed Markets 100 ADR ETF
(NasdaqGM:ADRD), annual fees: 0.3%
Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEArca:VSS),
annual fees: 0.38%
A number of funds select and filter international stocks based
on proprietary formulas using fundamental financial ratios:
- PowerShares FTSE RAFI Developed Markets ex-US Small-Mid
Portfolio ETF (
PDN
), annual fees: 0.75%
- WisdomTree DEFA ETF (NYSEArca:DWM), annual fees:
0.48%
- WisdomTree International LargeCap Dividend ETF
(NYSEArca:DOL), annual fees: 0.48%
- WisdomTree International MidCap Dividend ETF
(NYSEArca:DIM), annual fees: 0.58%
- WisdomTree International SmallCap Dividend ETF
(NYSEArca:DLS), annual fees: 0.58%
- WisdomTree International Technology Sector ETF
(NYSEArca:DBT), annual fees: 0.58%
- PowerShares FTSE RAFI Developed Markets ex-US Small-Mid
Portfolio ETF (
PDN
), annual fees: 0.75%
- WisdomTree DEFA ETF (NYSEArca:DWM), annual fees: 0.48%
- WisdomTree International LargeCap Dividend ETF
(NYSEArca:DOL), annual fees: 0.48%
- WisdomTree International MidCap Dividend ETF
(NYSEArca:DIM), annual fees: 0.58%
- WisdomTree International SmallCap Dividend ETF
(NYSEArca:DLS), annual fees: 0.58%
- WisdomTree International Technology Sector ETF
(NYSEArca:DBT), annual fees: 0.58%
PowerShares FTSE RAFI Developed Markets ex-US Small-Mid
Portfolio ETF (
PDN
), annual fees: 0.75%
WisdomTree DEFA ETF (NYSEArca:DWM), annual fees: 0.48%
WisdomTree International LargeCap Dividend ETF
(NYSEArca:DOL), annual fees: 0.48%
WisdomTree International MidCap Dividend ETF (NYSEArca:DIM),
annual fees: 0.58%
WisdomTree International SmallCap Dividend ETF
(NYSEArca:DLS), annual fees: 0.58%
WisdomTree International Technology Sector ETF
(NYSEArca:DBT), annual fees: 0.58%
The following leveraged funds are strictly for short-term
speculative trading:
- ProShares Short MSCI EAFE ETF (
EFZ
), annual fees: 0.95%
- ProShares Ultra MSCI EAFE ETF (NYSEArca:EFO), annual
fees: 0.95%
- ProShares UltraShort MSCI EAFE ETF (
EFU
), annual fees: 0.95%
- ProShares Short MSCI EAFE ETF (
EFZ
), annual fees: 0.95%
- ProShares Ultra MSCI EAFE ETF (NYSEArca:EFO), annual fees:
0.95%
- ProShares UltraShort MSCI EAFE ETF (
EFU
), annual fees: 0.95%
ProShares Short MSCI EAFE ETF (
EFZ
), annual fees: 0.95%
ProShares Ultra MSCI EAFE ETF (NYSEArca:EFO), annual fees:
0.95%
ProShares UltraShort MSCI EAFE ETF (
EFU
), annual fees: 0.95%
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the University
of Texas at Austin.