Among the various equity market themes materializing this year are ongoing discounted valuations in developed markets outside the U.S. and struggles for environmental, social and governance (ESG) strategies regardless of geography.
On the surface, those are ominous scenarios, but by digging deeper, investors can find opportunities with the combination of developed markets stocks and ESG. The SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX) is a way for investors to efficiently combine the themes of ESG opportunity and discounted developed markets stocks.
Interestingly, ex-U.S. developed market equities may not be getting the credit they deserve. That’s understandable amid this year’s volatile investing climate, but there are some points in favor of some RDMX components.
“International developed markets have shown stronger earnings sentiment than the US market since the beginning of Q3. 2022 earnings-per-share (EPS) growth estimates for international developed markets were upgraded to 21% from 18%, while S&P 500 growth estimates were downgraded to 7.5%. This increase has come despite hawkishness from global central banks and the continuing energy crisis,” noted Anqi Dong of State Street Global Advisors (SSGA).
While valuation alone isn’t a reason to buy or sell a stock or ETF, it’s hard to ignore the fact that international developed market equities, including some RDMX components, are trading at historically low levels.
“Yet valuations for international developed markets relative to the U.S. are at a 20-year low, as investors have shown pessimism toward the region. This may provide an attractive entry point for investors looking to diversify away from more growth-tilted U.S. large-cap exposures,” added Dong.
RDMX, which tracks the Bloomberg SASB® Developed Markets ex-U.S. Large & Mid Cap ESG Ex-Controversies Select Index, holds 433 stocks. The ETF allocates a third of its weight to Japanese and British stocks and those are two markets that are inexpensive relative to the U.S.
Speaking of inexpensive, RDMX is one of the more cost-effective funds in this ETF category, which is a positive trait for long-term investors. It charges just 0.12%, or $12 on a $10,000 stake, per year.
“All funds in the Morningstar Foreign Large-cap Core category have posted losses of at least 7.73% year to date. And 93% of those funds have higher expense ratios than RDMX.12 So investors may also want to consider RDMX as a potential tax-loss swap for international developed exposures, for tax and cost efficiency,” concluded Dong.
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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.