Few people outside of the brazen short traders are enjoying the give-and-take volatility currently wreaking havoc on Wall Street and the rest of the global financial markets.
After bouncing up 6.3% following six consecutive days of losses beginning on Aug. 18, 2015, the Dow Jones Industrial Average has scaled back much of the enthusiasm, with traders anxiously awaiting a possible interest rate hike by the U.S. Federal Reserve.
Whether Fed chair Janet Yellen decides to pull the plug on the easy money spigot or not, this much is clear: the turmoil in the markets has shaved off several percentage points among various international exchange-traded funds. The primary question, of course, is which funds represent genuine opportunities and which ones are dangerously deceptive contrarian traps?
When looking to leverage uncertainty in the markets to one’s favor, the best bet is to find otherwise strong or stable names trading at reduced valuations, rather than to gamble on completely demolished assets. For international ETFs, the best chance for success rests with developed and diversified economies — one that isn’t too dependent on any singular factor.
We’ll take a look at two international ETFs that should have a reasonably high probability of moving higher, as well as two that should be avoided at all costs!
International ETF to Avoid: iShares MSCI Malaysia Index Fund (EWM)
On paper, total Malaysian exports grew at a rate of 3.5% year-over-year in July, primarily due to increased shipments of electrical products. However, shares of this international ETF are down 26% year-to-date, scaring away much of the investment community.
They have every reason to be fearful. With the devaluation of China’s yuan currency, the exporting abilities for Malaysia have become far more competitive. As one of Asia’s largest exporters of crude oil, the devastation in the energy markets further places the Malaysian economy in a precarious position.
Technically, the Malaysian international ETF is a case of too much, too soon. Since peaking in late April of this year, EWM shares are in the hole more than 31%. The only sign of life occurred between Aug. 24 and Aug. 27, when EWM rose a measly 10% before eventually giving back most of those gains over the next few days.
Unless there is a compelling reason to take on such risk, most investors would be better served passing up this contrarian trap.
International ETF to Avoid: iShares MSCI Singapore Index Fund (EWS)
Over the next several decades, Singapore transformed into a veritable first-world challenger.
Unfortunately for investors of the iShares MSCI Singapore Index Fund (EWS), these factors failed to protect against recent global volatility. Similar to many other international ETFs levered towards Asian markets, the Chinese currency devaluation and its economic slowdown has put a damper on Singapore’s prospects, with EWS shares down 20% YTD.
Similar to iShares Malaysia, the EWS has absorbed most of the damage this year in just the past few weeks, with August down more than 11%. Currently, EWS shares are trading nearly 11% below its 50-day moving average, and there’s little evidence to suggest that a trend reversal is setting up anytime soon.
International ETF to Buy: iShares MSCI Germany Index Fund (EWG)
That, and continued hints dropped by the European Central Bank that additional quantitative easing may be required to lift the region out of its slump, is all the more reason to view the iShares MSCI Germany Index Fund (EWG) as a potential long-term investment.
Although shares of the EWG are around 16% below this year’s highs, price alone is not what makes this international ETF attractive. Providing exposure to the biggest German companies by market capitalization, the EWG’s top 10 holdings include a diverse range of industry leaders.
This is in sharp contrast to international ETFs exposed to the emerging markets, which has an inordinate exposure to the commodities markets — hence, the downfall in assets like the aforementioned EWM.
Admittedly, EWG shares have been wobbly, with the price action entering a bearish trend channel since the beginning of April. Nevertheless, the EWG appears to have found stability near the $25 level, where long-term technical support resides.
So long as shares do not fall appreciably below this level, an accommodative ECB along with an enviable range of powerful companies could make the Germany Index Fund the international ETF to buy right now.
International ETF to Buy: iShares MSCI Netherlands Investable (EWN)
It has also weathered the global economic storm better than the other international ETFs mentioned in this article, with the EWN up 86 basis points YTD.
Similar to the Germany Index Fund, the EWN features a broad range of top-ranked companies across diverse industries, including consumer cyclical, financial services, and technology. The Dutch markets in general will be buoyed by any accommodative measures taken by the ECB, which may be necessary given the weakness in China and the emerging markets.
EWN shares appear to be stabilizing near the $23 level, where a horizontal trend line has supported the price action over the past two years. Additionally, the current market price is inside 8% of its 50-day moving average. While that’s still a significant decline, it’s a considerable improvement over the magnitude of bearishness witnessed in the Asian markets.
It may not be the most widely known international ETF, but the broad market correction has made the EWN fund a very attractive play.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.