One of this year’s more prominent themes has been “U.S. or bust.” Another way of saying that is investors have been best served with U.S. equities. The returns offered by other major developed markets have lagged those of the U.S. Only Japanese stocks being anywhere stocks have come close to competing with U.S. shares.

However, broad developed market ETFs have easily trumped their emerging markets counterparts. The iShares MSCI EAFE ETF (NYSEArca: EFA), the fourth-largest U.S. ETF by assets, has gained nearly 10% year-to-date compared to a loss of 12% for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). [Hidden Benefits of Investing in EFA]

That trend of out-performance by EFA could continue as the ratio of performance between the two ETFs continues to make new highs and now resides around 1.575. “In September and December of last year we had some resistance form but saw a breakout in late January with EAFE taking the reigns and rarely looking back. In June and July we saw two touches of 1.575 as resistance but it appears we are breaking above that now with EAFE’s continued outperformance,” according to technical analyst Andrew Thrasher.

EFA, which has $42.6 billion in assets under management, holds shares of companies based in Australia, Asia, Europe and the Far East, making the ETF an indirect play on emerging economies with the risks and volatility of a pure emerging markets ETF. Japan, the U.K. and Switzerland combine for 53% of EFA’s weight and in the case of Japan and Switzerland, those have been two of the better developed markets outside of the U.S. this year. [Switzerland ETF: Beacon of Stability]

France is EFA’s fourth-largest country weight. The average year-to-date return for the single-country ETFs representing EFA’s top four geographic weights is 13.7%. By comparison, the average year-to-date loss for the largest China, South Korea, Taiwan and Brazil ETFs (those are EEM’s four largest country allocations) is 13.2%.

Thrasher’s analysis seems to indicate EFA will continue trumping EEM. “Turning our attention to the Relative Strength Index, we can see solid support has been found at the 50 level over the last few months. This has kept the ratio in a bullish momentum range during the current uptrend. However, as the ratio breaks to a new high we don’t seem to be getting the same reaction in the RSI indicator.” he said.

Investors looking for a lower beta alternative to EFA can consider the iShares MSCI EAFE Minimum Volatility ETF (NYSEArca: EFAV). EFAV, which is less than two years old and already has nearly $774 million in assets, has a beta against the S&P 500 of 0.64 compared to 0.76 for EFA.


ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EFA and EEM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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