The easiest way to visualize the stimulus chasing? Take note of the year-to-date affection for international stock ETFs in the Vanguard FTSE All World (VEU):S&P 500 SPDR Trust (SPY) price ratio. For the first time in a number of years, VEU has steadily gained momentum on SPY. The VEU:SPY ratio is above a long-term 200-day moving average; VEU:SPY also appears to be setting up for a “golden cross” – circumstances where the short-term 50-day moving average climbs above a 200-day.
For years, I have advocated strongly on behalf of the dollar-hedged international ETFs. I was one of the earliest proponents of WisdomTree Currency Hedged Europe (HEDJ); many of my clients own iShares Currency Hedged MSCI EAFE (HEFA) and/or iShares Currency Hedged Germany (HEWG). The idea has always been to remove currencies from the investing equation when investing internationally, particularly when exposure to the foreign companies might have been enough risk for ethnocentric Americans.
Yet the reality of the “will-they-or-won’t-they” speculation on a Fed policy shift has created an environment where sticking with the greenback is far from a sure-thing. An unwinding of the euro carry trade has been making traditional international stock ETFs more successful than their currency-hedged equivalents since early March. Look at the price ratios for HEFA:iShares MSCI EAFE (EFA) and HEWG:iShares MSCI Germany (EWG) in the charts below.
You do not have to shift back and forth between a currency-hedged international vehicle; rather, the key is simply recognizing that international stock ETFs have the stimulus to outperform an all-domestic portfolio. In other words, get your exposure one way or another. Or, better yet, pick up an unhedged basket of diversified international holdings via VEU as well as a currency hedged international asset like HEFA. It’d be a mistake to count on the S&P 500 to carry the entire weight of your portfolio’s stock universe.