While the Federal Reserve is tightening its monetary policy, other central banks are enacting additional easing. Consequently, exchange traded fund investors may find better growth opportunities in overseas markets.
David Garff, president and chief investment officer of Accuvest Global Advisors, who specializes in global portfolios, recently pointed out that the top performing countries were those that received the most economic stimulus from their respective central banks, writes Noah Hamman, CEO of AdvisorShares, for ThinkAdvisor.
With the U.S. cutting back on its quantitative easing plan, investors are beginning to pull away from U.S. stocks and are turning toward foreign investments. For instance, the Vanguard FTSE Europe ETF (NYSEArca: VGK), iShares MSCI EMU ETF (NYSEArca: EZU) and Vanguard FTSE Developed Markets ETF (NYSEArca: VEA) are among the top leaders in ETF fund flows year-to-date. [ETF Flows Firming in Second Quarter]
VGK tracks European markets. EZU specifically follows Eurozone countries. VEA includes global developed countries, excluding the U.S. and Canada.
Additionally, Hamman argues that foreign investments are capturing a rebalancing effect after the performance divergence caused investment portfolio imbalances, particularly after the outperformance in U.S. equities last year. The S&P 500 Index shows a price-to-earnings ratio of 16.67, whereas VGK has a P/E of 15.38, EZU has a P/E of 15.46 and VEA has a P/E of 14.43.
“Whether or not there is currently a rotation occurring from domestic to foreign is certainly debatable, but if not now, there will be one at some point,” Hamman said. “It is the nature of foreign versus domestic—one outperforms for a time and then the other, and then it repeats.”
While quantitative easing and loose monetary policies in the Eurozone and Japan would benefit their respective markets, Hamman also warns that these international ETFs will be the most at risk once central banks cut back on the quantitative easing. Consequently, he suggests looking into country-specific funds or actively managed ETFs that are able to avoid potential trouble spots. [Japanese Yen ETF: BOJ Governor Sees No Reason for Strong Currency]
For example, the actively managed AdvisorShares Accuvest Global Opportunities ETF (NYSEArca: ACCU) tracks country-specific ETFs, and the managers could shift strategies based on the market environment. Currently, ACCU includes exposure to China, the U.S., Sweden, Germany, South Korea and Israel.
For more information on global markets, visit our global ETFs category.
Max Chen contributed to this article.