Investors may be missing out on potential opportunities by focusing too much on the United States. Instead, one can utilize exchange traded funds to gain exposure to international markets and diversify an investment portfolio.
On the recent webcast, It’s a Big World – The Case for International Investing, Robert Bush, ETF Strategist at Deutsche Asset Management, said that global markets can provide higher returns with even lower risk profiles than the U.S.
Specifically, according to MSCI data, the world ex-U.S. markets have generated an average monthly return of 0.77% over the past decade with a standard deviation of 13.61, compared to the USA’s 0.72% monthly return with a 14.18 standard deviation.
In an optimized reward-to-risk investment portfolio, Bush calculated that investors should include about 43% to U.S. markets, 47% to developed Europe, Australasia and Far East countries, and 10% to emerging markets. The resulting portfolio would have produced a 7.2% return with a standard deviation of 15.4% over the past 15 years.
Moreover, Bush pointed out that hedging currency risks could also help diminish portfolio volatility, and a currency-hedged emerging market position even exhibited a lower standard deviation to U.S. equities.[related_stories]
For instance, ETF investors can look to the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which tracks developed Europe, Australasia and Far East countries, as a way to gain exposure to these developed markets. DBEF also includes a currency hedged component, which may diminish the negative effects of depreciating foreign currencies or a stronger U.S. dollar.
Additionally, the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) targets the emerging markets with currency hedged component as well.
“The weak dollar resulted in an unbalanced recovery, one that is destined to suffer a premature death if growth in the other major regions doesn’t improve,” Roger H. Scheffel, Principal and Co-Portfolio Manager at Willbanks, Smith & Thomas Asset Management, said. “We believe central bankers understand this and are now orchestrating a transition in monetary policy they hope will weaken the euro and the yen as a means to assist the rebalancing act. Such transitions are never smooth and inevitably lead to higher market volatility as investors grapple with the ramifications and reposition their portfolios.”
Christian Hille, Managing Director and Head of Multi Asset for EMEA at Deutsche Asset Management, believed that investors can also diversify their international equity exposure through multi-factor or smart-beta styled investments. These factors include value, high dividends, equal market-cap weights, momentum, minimum volatility and quality.
“Equity style factors exhibit beneficial diversification properties,” Hille said.
For instance, the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF) and Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG) track enhanced beta FTSE Russell indices that target quality, momentum, value, size and volatility – five key factors many financial institutions have looked at to help gain an edge over traditional beta indexing methodologies.
Along with seeing opportunities in currency-hedged and multi-factor strategies, Sean Edkins, Director and ETF Investment Specialist at Deutsche Asset Management, believes international investors should also look at high dividend strategies as yield-generating stocks.
For example, the Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF (NYSEArca: HDEF) and Deutsche X-trackers MSCI Emerging Markets High Dividend Yield Hedged Equity ETF (NYSEArca: HDEE) track high-dividend-yield indices select companies with dividend yields greater than or equal to 1.3 times the yield of the parent index and screen for quality, including return on equity, earnings variability and debt-to-equity. Additionally, the new funds also utilize forward currency contracts to diminish the negative effects of an appreciating U.S. dollar or weakening foreign currencies over the short-term.
Financial advisors who are interested in learning more about international investment strategies can watch the webcast here on demand.