ETF investors should take the pulse of the current market environment and consider global opportunities where real value can still be found.
On the recent webcast, Meb Faber’s Action Plan for International Investing in 2019, Meb Faber, Co-Founder and CIO of Cambria Investment Management, highlighted the pricey valuations in the U.S. compared to the rest of the world. Specifically, U.S. stocks were exhibited a Shiller CAPE Ratio of 30.7 as of the end of February 2019, which was comparable to the same valuations we witnessed back during the dotcom bubble. U.S. stock valuations are also trading about double those of foreign stocks.
When investors build a diversified investment portfolio, they should not forget that the U.S. markets only make up a portion of the total picture. Looking at the MSCI All Country World Index, we can see that the U.S. makes up 55% of the widely observed index. Meanwhile, the emerging market is only 12%, Europe ex-UK is 14%, the United Kingdom is 5% and Japan is 8%.
Investors also tend to exhibit a home country bias when investing. While the U.S. makes up a little over 50% of the global index weight, U.S. company stocks make up 79% of U.S. investor holdings. Many with a home country bias have listed a number of reasons why they invest the way they do, including greater understanding of U.S. companies, political risks, rule of law and U.S. companies also tend to receive 40% of revenue abroad.
Nevertheless, most investors now have a heavy tilt toward U.S. companies, which are now trading at historically high valuations.
Consequently, Faber argued that investors should be looking abroad to cheaper foreign markets as a way to diversify their investment portfolios. Specifically, investors may consider something like the Cambria Global Value ETF (NYSEArca: GVAL) to help exploit valuation opportunities in markets outside the U.S. The fund invests in about 100 stocks from the world’s most undervalued markets, targeting the cheapest, most liquid picks in countries where political or economic crisis have depressed valuations.
The underlying index begins with a universe of 45 countries taken from developed and emerging markets. The Index then selects the top 25% cheapest country stock markets as measured by Cambria’s proprietary long term valuation metrics, similar to the CAPE ratio. It then uses a valuation composite across traditional metrics such as trailing P/E, P/B, P/S, P/FCF, and EV/EBITDA to screen for the 10 most undervalued stocks out of the top 30 largest stocks by market capitalization within each country.
Furthermore, smart beta strategy shows an attractive 2.89% 30-day SEC yield and a competitive 0.68% expense ratio for the category.
Financial advisors who are interested in learning more about international opportunities can watch the webcast here on demand.