Inside the Need for International Stocks | ETF Trends

If there’s one asset class that’s long frustrated investors, it’s international equities. Both developed and emerging markets stocks have lagged behind domestic benchmarks, such as the S&P 500, for lengthy stretches. That’s left market participants to ponder whether or not investing outside the U.S. is worth the risk.

On the other hand, market leadership doesn’t last into perpetuity. That is to say, domestic stocks won’t be leaders forever and there could be times when international equities merit consideration. One of those times could be emerging today and it could shine a spotlight on exchange traded funds such as the Calvert International Responsible Index ETF (CVIE).

CVIE debuted in January and that could amount to some good timing as some market observers are forecasting upside for international stocks and some markets, such as Japan, are already delivering those goods. Japan is CVIE’s largest geographic exposure.

In terms of diversification, CVIE could be an important complement to portfolios because many global equity benchmarks are U.S.-heavy, indicating that investors buying the related exchange traded funds aren’t getting adequate exposure to foreign stocks.

Valuation Highlights CVIE Opportunity

Advisors and investors have long heard that ex-U.S. markets are inexpensive relative to the S&P 500, etc. That’s true today, but that scenario is arguably extreme and that could portend valuation opportunity with ETFs such as CVIE.

“Our Morningstar U.S. Market Index trades at about a 60% premium to our global ex-U.S. index,” noted Morningstar strategist Dan Lefkovitz. “Now, there has long been a premium, and it’s justifiable to some extent, given the growth orientation of the U.S. market and the profitability of some of the top companies in the U.S. But the valuation gap has really widened dramatically in recent years. So, if you go back 15 years, the valuation gap was more like 15%.”

Dividends also highlight the allure of ETFs like CVIE. Many ex-U.S. developed markets sport higher dividend yields than the S&P 500. Additionally, countries such as Japan, Switzerland, and the U.K., among others, are home to companies that are reliable growers of payouts.

“So, the dividend yield on the U.S. market index is 1.6%. The dividend yield on global ex-U.S. is 3.2%. So, it’s exactly double. It’s partly down to sector. So, the kinds of sectors, the value sectors like financials and industrials that are more heavily represented outside of the U.S. tend to be more dividend-rich,” added Lefkovitz.

Financial services and industrial stocks combine for nearly 36% of the CVIE portfolio.

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