Despite the focus on China and Greece, the global economy is humming along, with developed markets and related exchange traded funds potentially leading the way.
According to Morgan Stanley, the global economy could expand almost 4% in the second half of the year, compared to the 2.9% growth over the first six months, reports Simon Kennedy for Bloomberg.
Supporting global growth, international central banks’ monetary stimulus, which could even be extended by an additional 18 central banks this year, will translate into greater activity.
The investment firm also singled out developed economies as the leading force in the global economy.
“The strength of domestic demand in developed economies will be the key engine of growth,” Chetan Ahya and Elga Bartsch, Morgan Stanley’s co-chief economists, said. “We expect the global economy to continue on the path of gradual recovery.”
ETF investors who want to capitalize on the improved outlook for the developed economies can focus on Europe, Australasia and Far East, or EAFE, markets.
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. Country weights include Japan 22.6%, U.K. 20.1%, France 9.5%, Switzerland 9.5%, Germany 9.0%, Australia 6.7%, Spain 3.5%, Hong Kong 3.2%, Sweden 2.9%, Netherlands 2.8%, Italy 2.4% and Denmark 1.7%.
Additionally, the Vanguard FTSE Developed Markets ETF (NYSEArca: VEA) tracks developed markets, excluding the U.S. Country weights include Japan 23.0%, U.K. 19.5%, Switzerland 8.8%, France 8.6%, Germany 8.1%, Australia, Korea 3.9%, Hong Kong 3.7%, Spain 3.1%, Sweden 2.8%, and Netherlands 2.7%. VEA, which tracks a FTSE index, includes South Korea as a developed country, whereas MSCI considers the country an emerging market.
Currency risk is also a consideration as global central banks are enacting loose monetary policies while the Federal Reserve is thinking about a rate hike. Consequently, investors can 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.
Looking ahead, Hans Mikkelsen, a credit strategist at Bank of America Corp., argues that inflation will be the “key thing” for investors to focus on in the next five years.
“The current situation where long-term inflation expectations are robust – despite the big declines in oil prices – depicts a much better outlook for global growth,” Mikkelsen added.
For more information on the global markets, visit our global ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.