Developed international stocks and exchange traded funds are pulling ahead with the Eurozone strengthening on improved earnings and Japan finding support from domestic institutional investors.
In Europe, with the Greek debt woes dissipating, investors have been focused on the improved earnings season, according to Russ Koesterich, managing director and BlackRock‘s global chief investment strategist.
About 55% of European companies have beat estimates, with average year-over-year earnings-per-share growth of 15%. Additionally, banks and consumer discretionary companies have stood out, with 75% exceeding expectations.
Year-to-date, the iShares MSCI EMU ETF (NYSEArca: EZU) gained 7.9% and the SPDR EURO STOXX 50 (NYSEArca: FEZ) rose 6.5%. [Target Developed Europe ETFs If You Want Overseas Exposure]
Investors can also target European financials through the iShares MSCI Europe Financials ETF (NYSEArca: EUFN), which is up 9.8% year-to-date.
Koesterich, though, warned that market expectations for higher Federal Reserve interest rates have pushed up the U.S. dollar. Consequently, investors will exposed to currency risks when adding overseas assets.
Nevertheless, euro-currency hedged ETFs can help diminish the negative effects of a stronger dollar or weaker euro currency. Euro-hedged ETF options include the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ).
In Japan, stocks have been holding up under recent selling pressure, even with an appreciating yen currency. The Japanese equities market is being supported by Japan pension funds’ rotation into domestic equities – the three largest public sector pension plans have increased equity allocations by over 5% since last spring but still remain below the 25% target. Consequently, Koesterich argues that further institutional buying will follow this year.
The iShares MSCI Japan ETF (NYSEArca: EWJ) increased 14.1% year-to-date. [Even After Strong Performance, Japan ETFs Look Attractive]
Investors can also utilize currency-hedged ETF options to track a growing Japan with worrying about a depreciating yen, including the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP).
Alternatively, ETF investors who want to capitalize on the improved outlook for the developed economies can track Europe, Australasia and Far East, or EAFE, markets for more diversified exposure.
For instance, the iShares MSCI EAFE ETF (NYSEArca: EFA) and iShares Core MSCI EAFE ETF (NYSEArca: IEFA) both track EAFE countries. EFA and IEFA have identical country exposure, but IEFA has a cheaper fee of 0.12%, compared to EFA’s 0.33% expense ratio, and the “Core” offering also includes small-cap stock exposure. Both ETFs include about 65% in developed Europe and over 20% in Japan. [Ride Global Growth with Developed Market ETFs]
Investors can also hedge the currency risks and capture developed overseas market exposure with the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) and iShares Currency Hedged MSCI EAFE ETF (NYSEArca: HEFA). HEFA basically holds the same positions as EFA, except the hedged version uses cash and derivatives to mitigate the negative effects of a depreciating euro currency. DBEF tracks a hedged version of the MSCI EAFE Index as well.
For more information on the international markets, visit our global ETFs category.
Max Chen contributed to this article.