Turn to Europe, Japan ETFs for International Diversification | ETF Trends

The recent tumult sent equities reeling, providing a glimmer of market conditions ahead. In an environment of persistent volatility, investors should diversify to limit risk in the U.S., with developed international market exchange traded funds.

The recent focus on emerging market weakness was the straw that broke the camel’s back. U.S. stocks were beginning to look overvalued before the recent pullback, but problems overseas sent market falling. [2014 Will Be a Year of Moderation for Stocks, ETFs]

“While that volatility was a factor, we believe the decline in U.S. stocks also can be attributed to issues closer to home,” Russ Koesterich, BlackRock managing director and global chief investment strategist at BlackRock’s iShares, said in a note. “We have discussed previously that last year’s gains were powered primarily by multiple expansion, meaning prices were rising faster than underlying corporate earnings.”

Moreover, the current earnings season has been less than stellar to the, with the percentage of companies reporting better-than-expected results below the four-year average, adding to investor frustration.

“We’re seeing this frustration in the form of fund flows: U.S. equity funds have been seeing outflows, while European and global equity funds have been attracting assets,” Koesterich added.

Given the U.S. market environment, investors may be better suited to diversify into international stocks.

“For those investors who have been overly focused on U.S. stocks, we would suggest increasing exposures to international equities – specifically to the other large developed markets of Europe and Japan,” Koesterich added.