Some investors may be thinking about trimming their international exchange traded fund exposure after the recent outperformance, but it may not be time to let up just yet.
The revival in foreign equities is only just beginning, so investors who are itching to rebalance by diminishing exposure to outperforming overseas stocks could do more harm than good, writes Jonathan Clements for the Wall Street Journal.
For a diversified investment portfolio, an investor may hold 40% bonds, 35% U.S. equities, 20% foreign developed markets and 5% emerging market stocks, Clements said.
Normally, an investor would also rebalance positions to bring allocations close to their target percentages to help control risk. For instance, after the recent run in international markets, rebalancing would tell an investor to reduce outperforming foreign stock exposure to bolster positions in lagging markets, such as U.S. equities.
However, it may be premature to diminish foreign exposure this time around as investors should also consider the shifting global market cycles.
“Should you be rebalancing this year?” investment adviser William Bernstein, author of “The Intelligent Asset Allocator,” asked. “It’s a matter of personal taste. But my bias is somewhat against it.”
Specifically, Bernstein pointed to cheaper overseas valuations. For example, the Vanguard FTSE All-World ex-US (NYSEArca: VEU), which tracks international stocks and excludes the U.S. markets, shows a 16.2 price-to-earnings and 1.6 price-to-book. In contrast, the Vanguard Total Stock Market ETF (NYSEArca: VTI), which tracks the U.S. markets, has a 18.8 P/E and a 2.5 P/B. [Why It Is A Good Time To Consider International ETFs]