A prominent theme in the world of exchange traded funds this year has been investors’ renewed affinity for international equity funds, including developed and emerging markets.
In fact, several of this year’s top asset-gathering ETFs are funds focusing on ex-US stocks.
Among the most popular ETF plays of July, developed market and European equities were favored picks. The most sought after play was the iShares MSCI EAFE ETF (NYSEArca: EFA), which tracks the developed EAFE or European, Australasia and Far East countries.
Alternatives to EFA include the iShares Core MSCI EAFE ETF (NYSEArca: IEFA) and the Vanguard FTSE Developed Markets ETF (NYSEArca: VEA), both of which are also among the top asset-gathering ETFs year-to-date.
“We see opportunities in EM equities, assuming no sharp changes in currency, trade or other policies. Economic reforms, improving corporate fundamentals and reasonable valuations provide support,” said BlackRock in a note. “Elsewhere, we see a number of positives supporting the Japanese market, including more shareholder-friendly corporate behavior, ongoing ultra-easy monetary policy, low valuations and solid earnings. That said, a stronger yen is a risk.”
Diversified Europe ETFs have also been popular destinations this year as economies there rebound. The iShares MSCI EMU ETF (NYSEArca: EZU), which focuses on Eurozone members or does not include the likes of United Kingdom and Switzerland exposure, has been adding assets in significant fashion since the start of 2017.
The iShares Core MSCI Europe ETF (NYSEArca: IEUR), which is seen as a cheaper “core” alternative to older iShares Europe ETF (NYSEArca: IEV), has also been a popular choice for cost-conscious investors.
“European equities have done well this year, but they are still trading at a valuation discount to U.S. peers,” adds BlackRock. “We believe there’s further scope for this valuation gap to close, given the European economy’s strong fundamentals and a decline in populism. But a stronger euro could slow the pace of earnings growth among European companies, and other risks include politicians not delivering on reforms, the European Central Bank (ECB) winding back its stimulus too soon and renewed political instability in Italy.”
Related: International ETF Exposure That Neutralizes Currency Risks
Germany and France, which account for half of Euro area GDP, is expected to surprise on the upside as growth picks up speed. Moreover, the lessening political risk in Europe, leading indicators like purchasing manager index, demand for loans and sentiment surveys all suggest that the market continues to improve. BlackRock also pointed out that Eurozone stocks are particularly sensitive to changes in GDP and the ongoing global growth story could disproportionately support this region.
For more information on European markets, visit our Europe category.