With the rally in U.S. equities growing long in the tooth, exchange traded fund investors should look into other markets to diversify their portfolios.
On the recent webcast (available on-demand for CE Credit), ‘CARPe Diem’ Tactical & Strategic Positions Outside the U.S., Jared Rowley, Senior Investment Strategist at SPDR ETFs State Street Global Advisors, and David Garff, President and Chief Investment Officer of Accuvest Global Advisors, pointed out that international markets have outperformed this year, with the benchmark MSCI Emerging Markets Index leading the charge – emerging market equities are now the best performing asset class on a 12 month basis.
“In just five months, EM markets have more than doubled the return of the U.S.,” Garff said.
Investors have also become more receptive of international exposure, funneling over $60 billion to international funds to date as sentiment rebounded and geopolitical risks receded post-French election.
Looking ahead, Rowley said that State Street Global Advisors predicts emerging markets to lead in the equities space and U.S. high-yield debt to outperform in the fixed-income space over the next year.
As investors look to various markets to diversify their equity portfolio, international stocks also look more attractive. For instance, based on price-to-book, emerging markets are the only areas trading below their 10-year average while U.S. large-caps are trading at 10-year highs.
“Despite attractive valuations and compelling arguments over the past five-, three- and one-years, international has underperformed,” Joe Mallen, Chief Investment Officer at Helios Quantitative Research, said.
Furthermore, among the various factor strategies, SSGA anticipates the minimum variance or low volatility factor to outperform other factors like quality, value or equal weight.
Supporting the minimum variance outlook, the global economic policy uncertainty is hovering at an all-time high, especially in the aftermath of the Brexit and U.S. elections, Rowley said.
“With more uncertainty, there has been a divergence of volatility as traders are willing to ‘pay up’ to hedge to tail risk,” Rowley said.
Consequently, investors who are looking to gain international exposure but are wary of potential risks that could drag down returns may want to consider a low-vol strategy to smooth out the ride.
“Therefore, to reduce risk within equities, a multi-factor combination that includes min vol may warrant consideration,” Rowley added.
For instance, State Street Global Advisors offers a suite of MSCI StrategicFactors ETFs, including broad options like the SPDR MSCI EAFE StrategicFactors ETF (NYSEArca:QEFA), SPDR MSCI Emerging Markets StrategicFactors ETF (NYSEArca:QEMM) and SPDR MSCI World StrategicFactors ETF (NYSEArca:QWLD). The SPDR strategic factor suite select components based on a combination of three market factors, including value, quality and low volatility.
“As global economic uncertainty is at all-time highs, investors should go beyond market cap weighted or single factor low volatility strategies to seek out better buy and hold core exposures that can help mitigate downside but still capture a potential upside,” Rowley said.
Financial advisors who are interested in learning more about market opportunities can watch the webcast here on demand.