International equity ETFs are a major reason why ETFs easily eclipsed previous inflows records this year, but many investors remain under-allocated to foreign stocks.
Highlighting the theme of investors flocking to ex-US developed markets stocks and exchange traded funds this year, the iShares Core MSCI EAFE ETF (BATS: IEFA) is one of 2017’s top asset-gathering ETFs. In fact, only one ETF has added more new assets than IEFA this year.
IEFA debuted nearly five years ago as a cost-effective alternative to the iShares MSCI EAFE ETF (NYSEArca: EFA), which tracks the developed EAFE or European, Australasia and Far East countries. IEFA charges just 0.08% per year, the equivalent of $8 on a $10,000 position, while EFA has an annual fee of 0.33%.
“Markets outside the U.S. represent half of the total value of the 47 developed and emerging stock markets that make up the MSCI All Country World Index (Source: MSCI). Yet more than 80% of U.S. investors hold only domestic stocks, according to Morningstar,” said BlackRock in a recent note. “We suffer from a chronic case of home country bias, and in the process we may miss a lot of chances to potentially improve the risk/return in portfolios. It’s understandable. With years of supernormal returns from U.S. stock markets, investors with diversified global portfolios may feel fatigued by trailing the U.S. market.”
IEFA holds over 2,500 stocks with over half the ETF’s combined geographic weight dedicated to Japan, the U.K. and France. Overall, 16 countries are represented in the ETF. Eleven of those countries are European nations.
The European economy is steadily improving, supported by a wide range of indicators, which may lead to above average growth for the remainder of the year and into the next. Eurozone growth has accelerated, with growth and business indicators showing positive results.
Since their own financial crisis, Europe has enacted a number of structural reforms that may finally translate to improved earnings. Market observers project earnings per share growth for European stocks to remain strong and build upon the success over the first two quarters of the year.
“Perhaps the current bull market in foreign stocks will help nudge U.S. investors in the international direction. Many of these markets have seen positive performance throughout 2017. Flows into non-U.S. exchange traded funds (ETFs) have followed suit. Unusually, that growth is occurring across countries and regions,” according to BlackRock.
For more information on the ETF market, visit our ETF performance reports category.