Investors are turning to relatively cheap ex-US equity ETFs in developed markets as domestic companies appear increasingly expensive.
The Trump rally continues to grow, with stock markets boasting record highs. The S&P 500 is up more than 19% over the past year.
Yet while investors around the world have poured in around $236 billion to US stocks in that time, a sizeable chunk – almost $28 billion – has been invested in developed stocks outside of the country. The figure is striking considering US investors, which make up the vast majority of ETF investors, tend to have an overwhelming affinity for domestic investments.
Between April and June, the MSCI Europe Index posted earnings growth of more than 20%, beating the S&P 500, the MSCI Japan Index and the MSCI Emerging Markets Index. The Europe-focused index is also up in terms of returns over 11% in 12 months, beating US stocks’ 10.77% over the same timeframe, according to TrackInsight data.
Cheaper valuations across the pond
Overall, ex-US companies are up 6.73% over 12 months, slipping short of US stocks, but in terms of valuations ex-US equity markets look cheap compared to the S&P 500.
“More conventional valuation metrics also appear attractive on a relative basis, in our view; looking at 12-month forward P/E ratio for the MSCI All-Country World Ex-US index, we are currently at the largest valuation gap between US and non-US markets in the 15+ years of data to which we have access,“ according to a research note from RiverFront Investment Group.
New cheap international ETF on the block
One new ETF option, approaching its six-month anniversary, is the iShares Core MSCI International Developed Markets ETF (IDEV), which costs 0.07% in fees and has more than $92 million in assets under management, making it one of the top debut ETFs so far this year.
Unlike its competitors that track the MSCI EAFE Index, IDEV tracks the MSCI World ex USA IMI Index and includes Canadian stocks, which make up 9% of the fund. It also has significant exposure to the UK, Japan and France, constituting 47% of the fund.
If its popularity continues, IDEV could overtake the iShares Core MSCI Total International Stock ETF (IXUS), which has more than $6 billion in assets since launching in 2012 but costs double at 0.14%. It is up 18.70% over 12 months.