“The other takeaway that we should keep in mind is that the relative performance is cyclical. Periods of long under-performance have been followed by long periods of out-performance. The 4 intermittent cyclical periods of EAFE relative strength have lasted an average of nearly 4 years and produced a median out-performance by the EAFE of 7800 basis points,” notes Lyons.
Investors looking to wade back into EAFE stocks in anticipation that developed markets will rebound against the U.S. next year can consider an ETF such as the Shares MSCI EAFE Minimum Volatility ETF (NYSEArca: EFAV).
The low volatility approach to EAFE stocks has been significantly less bad over the past six months. EFAV is down just 4.4% over that time, a loss that is half as bad as EFA’s. The $1.2 billion EFAV features a larger weight to Japan than does EFA and much of the former’s low volatility advantage is attributable to its sector weights. [Lowering Volatility With International ETFs]
EFAV’s combined weight to consumer staples and health care stocks is almost 31.5%, or about 940 basis points higher than EFA’s weight to those sectors.
MSCI EAFE Index vs. S&P 500
Chart Courtesy: J. Lyons Fund Management
Tom Lydon’s clients owns shares of EFA.