International Stocks: The Case for CVIE

Investors are often told that diversification is key, and that includes embracing international stocks. However, over the trailing past three-, five-, and 10-year periods, that asset class has lagged domestic equities.

Those laggard performances have left many market participants pondering: “Are international stocks really worth the trouble?” The answer could be “yes,” because the tide appears to be turning in favor of ex-U.S. equities. Should that trend prove durable, exchange traded funds such as the Calvert International Responsible Index ETF (CVIE) might be worth considering.

A potential tailwind for CVIE that would broadly boost the diversification case for international stocks is a weakening U.S. dollar. Much of that scenario depends on when the Federal Reserve stops boosting interest rates. If it happens, a weaker greenback could serve to reduce correlations between domestic and developed international stocks, including some CVIE components.

“If the greenback goes into another longer-term slump or if the U.S. sinks into recession but other major non-U.S. markets manage to avoid one, it is conceivable that correlations between U.S. and international markets could again drift lower,” noted Morningstar’s Christine Benz.

CVIE Could Benefit From Value Rebound

One of the primary factors that has worked against developed international stocks over the past decade is the fact that the asset class leans heavily into value. Conversely, mega-cap growth stocks have stoked upside for domestic stocks over the past decade-plus.

On the other hand, pairing CVIE with a domestic growth ETF could position investors to not only enhance portfolio diversification, but also to potentially benefit from a value rebound.

“But in a period in which value-type sectors lead the way, non-U.S. stocks could outperform and help diversify U.S. exposure. Indeed, non-U.S. markets’ slightly higher weighting in energy and lower weighting in technology stocks contributed to smaller losses in 2022 than the U.S. market experienced,” added Benz.

CVIE is also geographically diverse — a trait that could serve to enhance the ETF’s ability to reduce correlations because single-country funds don’t always accomplish that objective.

Additionally, while it’s not a dedicated dividend ETF, CVIE has payout growth prospects by way of significant allocations to some of the more compelling ex-U.S. dividend markets. Those include Japan, the U.K., Switzerland, Australia, and Taiwan, among others. That quintet combines for about 45% of CVIE’s geographic exposure and resides among the top payout growth destinations outside the U.S.

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