International ETFs: Diversification and Overcoming ‘Home Bias’
May 20th, 2013 at 9:45am by Tom Lydon
The S&P 500 is up 17% year to date to new all-time highs. But U.S. investors who focus only on domestic stocks are missing out on enhanced performance and diversification over the long term.
“We do see investors have a home country bias,” Jim Ross, senior managing director and global head of ETFs for State Street Global Adivsor’s SPDR ETFs, said on a recent Charles Schwab conference call.
Investors have been too focused on U.S. stocks because they have been doing so well, at least for now – U.S. markets are up 17% year-to-date, compared to the 7% of other developed markets and the relatively flat performance in the emerging markets.
- SPDR S&P 500 ETF (NYSEArca: SPY): up 16.6% year-to-date
- Vanguard MSCI EAFE ETF (NYSEArca: VEA): up 10.3% year-to-date
- iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM): down 2.5% year-to-date.
Nevertheless, Ross suggests investors should “diversify away from your home” with international holdings, which help smooth out long-term portfolio performance.
Additionally, he explains that there are different products now available that will provide varying market exposure. For instance, in international bond ETFs, investors can take sovereign or corporate debt exposure.
Also on the call, Michelle Gibley, Director of International Research at the Schwab Center for Financial Research, noted that while economic growth and stock returns are correlated, it does not mean that both go hand in hand.
“Some believe that economic growth equates to high stock returns,” Gibley said. “High economic growth can generate higher revenue but that is not always the case.”
Moreover, Gibley warns of the “misconceived view of economic make up of countries, but stocks don’t reflect that position.”
For example, Australia is known as a commodity country, but its stock market is heavy on financials. In the iShares MSCI Australia ETF (NSYEArca: EWA), the financial sector makes up 51.3% of the portfolio.
Looking overseas, Gibley pointed out opportunities in the Eurozone and Japan, suggesting investors should shift from emerging market stocks to developed market stocks.
In the Eurozone, she points to a type of duel dose of relief in the form of loosening monetary policies and lower fiscal drag. [A Europe ETF to Play the ECB’s Loose Monetary Policies]
Meanwhile, Japanese equities are skyrocket on the new policies in what Gibley dubbed “Don’t fight the Bank of Japan.”
“Sixty percent of Japan’s economic growth is through consumption,” Gibley said. “The Bank of Japan made safer assets less desirable and pushed investors to riskier assets. This creates a wealth effect that promotes spending.”
While yen-hedged Japan ETFs have been outperforming as the currency depreciates, Gibley also argues that the hedge will become less important once the yen stabilizes. [Japan ETFs Pause After GDP Data]
For more information on international exposure, visit our global ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY and EEM.
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