How to Take Advantage of Cheap Valuations on Foreign Stocks

Ex-US developed market equities are again trailing the major U.S. equity benchmarks. That isn’t the only familiar theme being replayed in 2019. Plenty of large developed markets outside the U.S. are also inexpensive, a trait that could lure some investors.

One avenue for accessing those attractive valuations with reduced volatility is with the ProShares MSCI EAFE Dividend Growers ETF (CBOE: EFAD). EFAD tracks the MSCI EAFE Dividend Masters Index, which includes members of the MSCI EAFE Index that have dividend increase streaks of at least 10 consecutive years.

EFAD may help investors gain improved risk-adjusted returns to European markets by diminishing downside risk while still participating in upside potential. Furthermore, its dividend focus also helps investors focus on quality companies with a history of growing dividends. There are good reasons to consider EFAD over a traditional, broad developed markets ETF.

“Foreign markets look cheap, compared with the U.S. Negative economic trends in Europe and China appear to be priced into multiples,” reports Darren Fonda for Barron’s. “Central banks have eased up quite a bit, stimulating growth. And if geopolitical storms such as the U.S.-China trade dispute and Brexit can be resolved, then foreign stocks could mount a comeback.”

Examining EFAD

Stocks in Europe and in international developed markets often have higher yields than those in the U.S. That means it’s possible to take advantage of a dividend growth strategy and relatively high dividend yields. International dividend growth stocks also come without the added U.S. interest rate sensitivity of high dividend-paying stocks.

“The rationale for foreign markets isn’t particularly popular among investors, based on positioning reports among hedge funds and mutual funds. But the stars are starting to line up, according to Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management,” reports Barron’s.

Faced with intense market uncertainty fueled by trade wars, political discourse, earnings pressures and more, advisors are looking for quality investments—strategies such as dividend growth —that have a demonstrated history of weathering periods of market volatility.

“But a pivot to foreign markets may be underway. Shalett points out that the MSCI Europe Total Return Index, priced in euros, has beaten the S&P 500 Total Return Index in the past 12 months,” according to Barron’s. “Valuations are high in the U.S., while earnings growth has flattened. A year ago, foreign markets were priced for Fed tightening and a U.S. recession.”

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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.