International exchange traded funds are favored destinations this year as investors look for compelling values with the U.S. bull market getting older. Major ex-US benchmarks, such as the MSCI EAFE Index and the MSCI Emerging Markets Index, are proving their mettle, delivering returns well in excess of the S&P 500.
That theme is benefiting ETFs, such as the iShares Core MSCI EAFE ETF (CBOE: IEFA). 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. Emerging markets ETFs, including the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), are getting in on the act as well.
Importantly, fundamentals support more upside for ex-US equities, particularly as earnings rebound in international markets.
“Now the situation is different, thanks to the most synchronized global expansion in the post-crisis period,” said BlackRock in a note. “The earnings pick-up unfolded in Europe and Japan this year despite the drag of stronger currencies on exporters. Both regions are expected to see earnings growth outpacing that in the U.S. for 2017. We think this trend has more room to run, in part because we see this year’s euro and yen strength slowly reversing.”
In every quarter this year, IEMG has been among the top asset-gathering ETFs. IEMG has never suffered outflows since coming to market over five years ago.
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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.
“The global economic expansion is finally filtering through to the bottom lines of companies in Japan, Europe and EM,” according to BlackRock. “A bout of euro and yen strength earlier this year raised some doubts about corporate performance, yet ended up doing little to dent improving profitability. Japanese companies increased earnings by 17% in the latest quarter—the best year-on-year increase of any major developed market.”
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