Foreign Markets Topped U.S. This Year; Will They Repeat In 2018?

An image of rising and declining prices Credit: Shutterstock photo

It's been a very good year for the U.S. stock market. The S&P 500 index was up 18.9% for the year as of Dec. 13. But international investors have had an even better year.

[ibd-display-video id=3012111 width=50 float=left autostart=true] The benchmark MSCI EAFE Index, which holds 928 large and midcap stocks from the developed world, excluding the U.S. and Canada, is up 23.1% and the benchmark MSCI Emerging Markets Index, with 837 stocks from 24 countries, has climbed 32.3% so far this year. IShares Core MSCI EAFE ETF ( IEFA ) is up 25% this year and iShares Core MSCI Emerging Markets ETF ( IEMG ) has jumped 33% so far.

One reason emerging markets did so well is that they were down for such a long time. Now, most of these countries see their economies growing and their currencies strengthening. Even China, which is seeing its economy slow from a phenomenal pace of growth, is still one of the fastest growing economies in the world. And India is the largest of the four fastest growing economies - Ethiopia at 8.3%, Uzbekistan 7.6%, Nepal 7.5% and India 7.5%, according to the World Economic Forum.

"A big theme that happened this year is that, globally, technology stocks significantly outperformed both developed and international indices," said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research. "Some of the better performing country ETFs are being driven by their weightings in technology, such as China, Korea and other emerging Asian markets, as well as Japan and Hong Kong."

According to Morningstar, the top three emerging market ETFs so far this year are WisdomTree China ex-State Owned Enterprises ETF ( CXSE ) which rocketed 77.8%, Guggenheim China Technology ETF ( CQQQ ) up 69.6% and KraneShares CSI China Internet ETF ( KWEB ) up 64.6%.

ETFs that track the broad Chinese market were also top performers. PowerShares Golden Dragon China Portfolio (PGJ) soared 54.1%, iShares MSCI China ETF (MCHI) leapt 52.8% and SPDR S&P China ETF (GXC) gained 46.8%. Considering China makes up 30% of the MSCI Emerging Markets Index, it's no surprise that index had such a strong year.

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Other top-performing emerging markets include India, Poland, Korea and Argentina, which MSCI considers a frontier market.

"The emerging markets are the cheapest markets today. My favorite is India," said Rob Lutts, president and chief investment officer of Cabot Wealth Management, a registered investment advisor (RIA) in Salem, Mass. He likes India's financial services sector, in particular HDFC Bank (HDB), which trades on the New York Stock Exchange. He also likes Colombia India Infrastructure ETF (INXX), which is up 43.6% this year. "It's a good position for the capital growth sector."

Lutts also recommended a frontier market for 2018, Global X MSCI Nigeria ETF (NGE), which is up 30.8% this year.

The broad market iShares MSCI India ETF (INDA) only gained 31.5%, but VanEck Vectors India Small-Cap ETF (SCIF) climbed 55.4% and the iShares MSCI India Small-Cap ETF (SMIN) rose 53.8%.

VanEck Vectors Poland ETF (PLND) is up 48.4% and iShares MSCI Poland Capped ETF (EPOL) is up 46.5%.

"We're most bullish about Poland because of its economic growth and the tailwind there," said Michael Underhill, chief investment officer for Capital Innovations, a Milwaukee, Wis., asset management firm. "We also think Russia is massively undervalued and due for a resurgence."

Global X MSCI Argentina ETF (ARGT) soared 51.8% year to date. And iShares MSCI South Korea Capped ETF (EWY) rose 42%.

"I look at Argentina since Mauricio Macri became president and I see a 180 degree turn from socialism to capitalism," said Underhill. "They devalued their currency, which led to more stability in the debt and equity markets. Now they are courting foreign direct investments. I like the prospects for Argentina in 2018."

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In the developed markets, iShares MSCI Germany Small-Cap ETF (EWGS) took top billing with a 52% rise. But among broad market country funds, iShares MSCI Austria Capped ETF (EWO) won with a 44.6% gain. Reports say Austria's rally is based on rising confidence in the strength of the European economies.

Other big gainers among developed market ETFs were First Trust Germany AlphaDex ETF (FGM), up 40.6%, First Trust Hong Kong AlphaDex ETF (FHK)), up 36.6%, iShares Netherlands ETF (EWN) up 33%, iShares MSCI Singapore Capped ETF (EWS) up 35.6%, and iShares MSCI Italy Capped ETF (EWI) up 29.9%.

"Italy had problems with nonpayment of taxes, but they've cracked down," said Underhill. "The Italian economy looks better now in terms of stability and revenue generation. If things keep together and we don't have major geopolitical issues in Middle East or North Korea, I think the prospects for 2018 look pretty bright globally."


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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