I’m continuing my series on finding the best ETFs for different types of investors. Of course, everyone’s investing style is different and when it comes to finding the best exchange-traded funds, one size definitely does not fit all. You have to examine your own investment style and risk tolerance as well as the fund manager’s approach whenever you purchase any ETF.
I stick to foreign large-cap stock ETFs. The problem with many emerging markets, including countries like Russia and China, is that securities oversight is lax. The Securities and Exchange Commission hasn’t been doing the best job here in the Unites States. But if we can’t get it right, you can’t expect less developed markets to do much better.
It’s especially important when it comes to international funds to be broadly diversified. I like funds that diversify across countries and sector and that have a lot of holdings.
That’s why I usually don’t invest directly in international stocks. I prefer to find the best ETFs. Read on fto see my picks for the three best international stock ETFs.
Best ETFs: Invesco PowerShares DWA Developed Markets Momentum
For aggressive investors, I suggest PowerShares DWA Developed Markets Momentum Portfolio (PIZ). This oddball ETF from Invesco evaluates stocks from developed countries including Australia, Canada, Finland, France, Germany, Hong Kong, Italy, Japan, Norway, Portugal, Singapore, Spain and Switzerland. Then it selects the companies that have the highest relative-strength in those markets.
Here you are banking on the notion that foreign stocks that are performing well will continue to perform well. The strategy seems to work. The returns have run from a loss of 43% in 2008 — which actually was a bit better than U.S. indices that year — to a gain of 22.78% last year, which was comparable to U.S. markets. This year, the fund is down 4.73%.
PIZ’s assets are diversified across many sectors, even though the fund only holds 110 stocks. The top ten holdings represent 25% of assets, so that’s a heavy influence. The ETF’s expense ratio is comparable with other foreign funds at 0.81%.
The largest holdings of this fund trade only on foreign exchanges: Constellation Software Inc., Ramsay Health Care Limited, and CSL Limited.
Best ETFs — First Trust Developed Markets Ex-US AlphaDEX ETF
If you’re a more conservative investor looking for the best ETFs in international stocks, I suggest First Trust Developed Markets Ex-US AlphaDEX ETF (FDT). FDT has a very specific criteria for choosing its holdings, described here. Essentially, it is an enhanced index which includes the 300 stocks that show up at the top when the stocks in the index are ranked on a set of selection of criteria. Then the ETF gives each stock an equal weight in order to keep any stock from taking up too much space in the fund.
I like this quasi-managed approach and the diversification. The top 10 holdings account for only 7% of the total asset base, so this is one of the best ETFs when it comes to diversification in international stocks.
You will not recognize most of the names included, although you probably know SEIKO EPSON UNSP ADR (SEKEY) and Fujitsu Ltd (FJTSY).
This ETF also offers sector diversity. It has 24% of assets invested in financials, 18% in industrials, 17% in consumer discretionary, 12% in tech, 4% in utilities, 5% in healthcare and 6% in energy. It carries a .8% expense ratio and is down 4.53% year-to-date.
Best ETFs: Deutsche X-trackers MSCI EAFE Hedged Equity ETF
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The best ETF for all-around international holdings might just be the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF). The broad approach is what I like with this fund. It seems to go out of its way to split itself across every sector and geography as equally as possible.
Geographically, DBEF has 50% of its holdings in Europe, 21% in Japan, 8% in Australia, 5% in developed Asia, .5% in the Middle East, a mere 0.2% in the U.S. and .04% in Latin America. It stays away from emerging markets so you give up the risk and reward of that region as a result.
This ETF holds a whopping 904 stocks, which offers enormous diversification compared to its counterparts. It is hedged for foreign currency exposure.
The top ten holdings account for only 13% of the assets. The sector breakdown is 22% financials, 6% energy, 12% health care, 11% consumer cyclical, 5% tech, 11% industrial and 6% communications.
The broad approach has led it to include the following familiar names in its top three holdings: Nestle SA Reg Shs. Ser. B Spons (ADR) (NSRGY), Novartis AG (ADR) (NVS) and Roche Holding Ltd. (ADR) (RHHBY). DBEF has a reasonable expense ratio of 0.35%.
