After surging last year, ex-US developed markets exchange traded funds are struggling this year. For example, the widely followed MSCI EAFE Index is lower by more than 4% year-to-date.
The iShares MSCI EAFE ETF (NYSEARCA: EFA), which tracks the MSCI EAFE Index and is the largest international equity ETF in the U.S., is coming off a rough June that saw the ETF make some ominous technical moves. According to iShares, EFA “seeks to track the investment results of an index composed of large- and mid-capitalization developed market equities, excluding the U.S. and Canada.”
“EFA peaked early this year, notching its high close of $75.25 back on Jan. 26 (just prior to the volatility “melt-up” that roiled markets). Following a rapid-fire series of bear gaps, the $72 level emerged as resistance in early February, and went on to cap EFA’s rally attempts later that month and throughout May,” reports Schaeffer’s Investment Research.
June Gloom for EFA
EFA looks to wider geographic areas to add alpha over a traditional international benchmark, while still providing attractive diversification qualities across numerous countries, sectors, and market cap styles. Amid increasing international trade tensions, international ETFs, including EFA, tumbled in June.
“It was a fresh round of trade-war threats on June 19 that really hammered EFA lower. The fund gapped below its 320-day moving average at the open, and ultimately lost 2.8% that day. By last Monday, EFA was exploring fresh year-to-date lows — and by Thursday, the exchange-traded fund’s 50-day moving average crossed below its 200-day counterpart, forming the ominous-sounding “death cross” pattern that’s widely viewed as confirmation that a downtrend is in place,” according to Schaeffer’s.
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The $71.39 billion EFA holds over 900 stocks with over 40% of its combined weight allocated to Japan and the U.K. Those and other ex-US developed markets are attractively valued relative to the U.S. as highlighted by EFA’s price-to-earnings ratio of just over 14, implying a significant discount to the S&P 500. Still, the fund has technical issues to correct.
“It’s not unusual for EFA to struggle at this time of year, according to Schaeffer’s Quantitative Analyst Chris Prybal — who notes that, since inception, EFA has delivered its worst average monthly return of the year in June, when the fund tends to drop 1.9%. So, with July now upon us (and bringing with it an average historical return of +1.0% for EFA), is it safe to assume that the worst of the sell-off is over?,” adds Schaeffer’s.
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