With the summer season slowly fading away, global markets — and their corresponding exchange-traded funds — have some catching up to do. The S&P 500 Index is up 6% year-to-date, a relatively solid performance. The same, though, can’t be said for a large chunk of international indices. Germany’s DAX Performance-Index is down 4% YTD, while Japan’s Nikkei 225 is off by 13%. Hong Kong’s Hang Seng Index is far better in comparison, but has so far only gained 1% for the year. This puts a lot of pressure on which international ETFs to buy.
While the common assumption is to buy domestic-based ETFs, the reality is that the American markets are simply overvalued. According to the Associated Press, the current economic recovery following a recession is the weakest since the World War II era.
That puts a dark cloud on record levels achieved across blue-chip indices. Tellingly, consumer spending has grown a feeble 6.5% since the end of the Great Recession. The disconnect between Wall Street and Main Street is further evidenced by weak signals from consumer sentiment metrics.
This not an invitation to trash your domestic ETFs to buy list. Long-term, the stock market has an upward bias, making it ideal for retirement planning. But for those who want to profit in a more immediate timeframe, international ETFs offer higher upside potential. Many are well off record price points, theoretically giving these funds more room to run.
At the same time, not every market will be profitable. A discerning analysis is key for success. Here are two international ETFs to buy, and two that you definitely want to avoid.
International ETFs: Ishares MSCI India ETF (INDA)
Click to Enlarge Among both emerging market indices and international ETFs to buy, the Ishares MSCI India ETF (BATS:INDA) provides a compelling story. Primarily, strong growth in Indian factory activity bolsters the case for investing in INDA.
According to Reuters, the country’s purchasing managers’ index increased slightly to 51.8. This was the seventh time this year that the PMI was above 50, which is the demarcation point between growth and contraction.
A move up in production orders contributed to July’s figures, helping to offset some weakness seen in the second quarter. More significantly for consumers, inflation rates have been lower than expected, sliding south of long-term averages.
That provides extra ammunition for India’s central bank, which has the option of further devaluing the rupee. A previous devaluation improved the nation’s exports, and doing so again would likely stimulate India-based ETFs and other investments.
That’s all great news for INDA buyers who’ve already taken the plunge.
The fund is up 7% YTD, matching the returns of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). The difference, though, is that the SPY has been mostly flat since mid-July. In contrast, the INDA has been trading in a decisively bullish trend channel since the beginning of March. As a result, its trailing six-month performance is nearly 14%.
In a global arena that’s often spewing hot and cold sentiments, the INDA is one of the best ETFs to buy!
International ETFs: iShares MSCI Chile Inv. Mt. Idx. Fd(ETF)(ECH)
Click to Enlarge Among international ETFs to buy, the iShares MSCI Chile Inv. Mt. Idx. Fd(ETF) (NYSEARCA:ECH) is admittedly a surprising — and seemingly contradictory — idea. In sharp contrast to the INDA fund, the underlying Chilean economy was hit hard by rising unemployment and falling industrial production.
This is now the third year of lackluster economic growth, prompting speculation of monetary intervention. Chile’s consumer base are also feeling the heat, dialing back their spending.
This seems like a recipe for disastrous international ETFs to sell — and under ordinary circumstances, I’d agree with you.
However, the math doesn’t lie. The ECH is one of the best performing ETFs of its kind, having gained 19% YTD. Better yet, the growth has been very consistent. Only the month of May has seen the ECH fall into negative territory. July tacked on 4%, suggesting that the ECH could run further still.
One overlooked factor that could explain the contradiction between technicals and fundamentals are precious metals. Chile’s economy is highly dependent upon its mining industry. According to Research and Markets, in 2015, Chile was the fifth-largest silver producer in the world, and the thirteenth biggest gold producer in the year prior. Both gold and silver are one of 2016’s best investment assets, and industrial metals like copper are starting to move higher again.
Considering the historical volatility of commodity markets, ECH is certainly more risky than other international ETFs. Nevertheless, the reward potential is quite large for those that can tolerate the risks.
International ETFs: iShares FTSE/Xinhua China 25 Index (ETF) (FXI)
Click to Enlarge China-based funds have been the crown jewel among international ETFs to buy. But with the spectacular boom and bust cycle of the Shanghai Stock Exchange last year, many are understandably pensive about Chinese stocks.
That’s reflected in the trading patterns of the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI). Although it has moved significantly higher over the past few months, the FXI for the year is virtually flat.
There are two ways of approaching the Chinese markets. On the bullish side, there’s the assumption that no major index can continue to flounder without a genuine attempt at a comeback. The FXI appears to be doing exactly that. And companies that do significant business with China are reporting improvements in market share and sales growth. That’s especially important when central bank intervention has failed throughout the developed world, and events like Brexit has the global investment community on edge.
On the other hand, China’s economy is far from a stable recovery. From a macro scale, the economy has grown “at the slowest pace in a quarter century,” according to Bloomberg. Furthermore, Chinese companies have been heavily pressured from the weight of record debt payment. From the numbers that can be confirmed, at least 17 bonds have defaulted in 2016, well exceeding last year’s total of seven.
Investors may view the fundamentals as 50/50. But with so many other ETFs to buy, is a coin toss probability really worth the risk?
International ETFs: Ishares Msci Turkey Inv Market Index Fd (TUR)
Click to Enlarge There are several cases where contrarian logic seems to be the pathway to success in the markets. Case in point is Brazil. Mere days away from the Summer Olympics, the country seems ill-prepared for hosting the games.
A host of troubles, ranging from the worrisome Zika virus to street crime, have weighed on both athletes and spectators alike. Yet, surprisingly, Brazilian ETFs smoked most of the field. Though encouraging, investors should not view the Ishares Msci Turkey Inv Market Index Fd (NYSEARCA:TUR) in the same light.
As the gateway between Europe and Asia, Turkey should be well-positioned to be an economic powerhouse. However, it’s all potential and very little realization. In the wake of the failed military coup, the Turkish lira has fallen to record lows against the U.S. dollar. Additionally, the country’s equity markets have experienced a rash of sell orders. The purging of suspected dissidents has done absolutely nothing to bring what Turkey needs most — stable leadership.
Apologists can point to the fact that the TUR fund is up 5% YTD.
In that regard, it’s pretty similar to the SPY. But that’s where the comparisons end. TUR is down more than 17% over the past 90 days. Turkey borders some of the world’s most dangerous countries. Kidnapping and terrorism threats are an everyday reality to tourists and foreign workers.
There’s no room to play the contrarian hero with TUR. Sometimes, an ugly situation is really just an ugly situation.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.