Comparing International and Domestic ETFs

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.
[viet globe statue]

International vs. Domestic ETFs

At the outset of the year, I argued that international equity exchange-traded funds (ETFs) likely would outperform domestic equity ETFs. So far, that thesis has come to fruition, with many international equity ETFs up 3-4% on the year while most domestic markets are up just 1-2% year to date.

The chart below illustrates the relative performance of two international stock ETFs — the iShares MSCI EAFE (EFA) and the iShares MSCI Emerging Markets (EEM) — vs. domestic stocks in the SPDR S&P 500 ETF (SPY).


This chart represents the past three years of price action in these markets. As you can see, domestic stocks have been far better performers than international stocks, particularly during the past two years.

Yet due to the cyclical nature of markets, and the relative overvaluation in domestic stocks vs. international stocks, the current environment is, I suspect, more conducive to greater upside in international ETFs going forward when compared to domestic ETFs.

It is also important to factor in that there is no more tailwind of quantitative easing (QE) for U.S. stocks now that the Fed has stopped buying bonds. Yet in Europe, this QE tailwind is blowing strong, as the European Central Bank is just getting its own version of quantitative easing going. This week, we also saw that the Swedish Riksbank (the country’s central bank) announced it was going to be doing some bond buying — and that’s very bullish for international ETFs vs. domestic ETFs.

For some time now, my subscribers have been taking advantage of the action in foreign markets, and we plan to continue doing so based on the aforementioned thesis. If you’d like to do the same, then I invite you to check out my Successful ETF Investing advisory service today.

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Hedged Currency ETFs

As I’ve been telling you for the past couple of weeks, I recently attended the largest meeting of the ETF minds in the country, the Inside ETFs Conference. This huge event had nearly 2,000 attendees, all focused on how to make the most of ETF investing. There was a tremendous lineup of speakers, a wide array of topics were discussed and just about every ETF issuer was in attendance.

Recall that in our last issue of the Weekly ETF Report, I told you about the extreme innovations in smart-beta ETFs. This week, I want to tell you about another innovative segment of the ETF industry that’s seen big growth, and that’s hedged currency ETFs.

These funds are designed to take advantage of the upside in their respective countries. But what’s interesting about these ETFs is that they also hedge out the currency risk associated with a specific currency (e.g. the euro, yen, etc.).


The chart here of EFA vs. the Deutsche X-trackers MSCI EAFE Hedged Equity (DBEF) shows the relative outperformance of the same stocks when you factor in the currency hedge.

Here we see that during the past three years, the currency hedge ETF, DBEF, has significantly outperformed the non-currency hedged ETF, EFA. Because the euro has been under significant pressure since mid-2014, stocks in the EFA have been kept under wraps. Yet with the benefit of a currency hedge, those same stocks have continued to shine.

If you are going to invest internationally, and you definitely should, consider looking into hedged currency ETFs.

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Valentine’s Day Humor

“The only really happy folk are married women and single men.”

–H. L. Mencken

Although this slice of Mencken humor doesn’t apply to me (and I hope it doesn’t apply to you), I did think it was a good bit of humor, given that so many people will be celebrating Valentine’s Day Saturday. But please remember that it’s all just in fun.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about how volatility has returned to the market. I also invite you to comment in the space provided below.

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