With the U.S. equities market expected to slow down this year, exchange traded fund investors may want to look to overseas markets, like the Eurozone or Japan.
Citi strategists downgraded U.S. equities Tuesday, citing potential negative impact of Federal Reserve interest rate hikes and stalling corporate profitability, reports Matt Clinch for CNBC.
“Fading EPS momentum and rising Fed funds mean that, after six consecutive years of outperformance, we cut the U.S. to underweight,” Citi said in a note.
Meanwhile, Deutsche Bank economists cut U.S. economic growth forecasts Tuesday due to recent disappointing data on trade, construction spending and manufacturing activity, reports Richard Leong for Reuters.
Consequently, investors may do better broadening their investment horizons with overseas exposure.
“Decent EPS momentum and continued central bank support mean that we prefer Europe, excluding U.K., and Japan equities,” Citi also said in the note.
In the Eurozone, the European Central Bank has been tackling slow growth and low inflation, which many observers argue are signals that the central bank could be forced to take on more quantitative easing to bolster growth. Additionally, in Japan, the Bank of Japan has been adhering to aggressive monetary policies while the government already implemented looser fiscal policies to promote growth.
People seeking investment options to European markets can take a look at iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ). The two non-hedged ETFs both focus on Eurozone countries.
However, with the ECB engaging in loose monetary policies that could dampen the euro currency against the U.S. dollar, investors can also consider euro-currency hedged ETFs, which diminish the negative effects of a stronger dollar or weaker euro currency. Currency-hedged Eurozone 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).
For Japan market exposure, investors can take a look at he iShares MSCI Japan ETF (NYSEArca: EWJ).
Japan, like the Eurozone, is also actively trying to maintain a weaker currency. Consequently, currency hedged ETFs, which diminished the negative effect of a weaker yen currency, could outpace non-hedged funds. For currency-hedged Japan exposure, investors can look at 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).
Max Chen contributed to this article.