This will go down as another year in the laggard column for international stocks versus their U.S. rivals. As of Nov. 1, the S&P 500 is higher by 24.2% year-to-date, including paid dividends, while the MSCI EAFE and MSCI Emerging Markets indexes are up 18.2% and 11.5%, respectively.
How gloomy of a run has it been for international equities? Glad you asked. Since 2013, the only year in which either the MSCI EAFE Index or the MSCI Emerging Markets Index beat the S&P 500 was 2017, when both international benchmarks accomplished that feat.
It’s statistics like those and pure outperformance by U.S. stocks that are keeping many investors away from international exchange-traded funds. How bad has it been for international ETFs? Glad you asked that, too, because the statistics are startling. But some of the major ex-U.S. benchmarks are performing admirably this year.
Rather, the tales of woe for international ETFs stem from investors’ distaste for the asset class. As of late October, in aggregate, international ETFs have seen year-to-date outflows. Sure, some cheap funds in the group, including staples like the Vanguard FTSE Emerging Markets Index Fund (NYSEARCA:VWO) and the iShares Core MSCI EAFE ETF (BATS:IEFA) have added assets, but broadly speaking, investors currently aren’t swooning over international ETFs.
Still, there are compelling opportunities beyond U.S. borders. And for investors willing to explore those opportunities, some of the following international ETFs could prove to be winning bets.
International ETFs to Buy: Global X MSCI Greece ETF (GREK)
Expense Ratio: 0.59% per year, or $59 on a $10,000 investment.
For investors willing to take on a bit more risk with an international ETF, the Global X MSCI Greece ETF (NYSEARCA:GREK) is an option that makes some sense. Sure, a year-to-date gain of 40% may imply limited upside from here, but other points indicate Greece’s redemption story may still be in its nascent stages.
Greece was once one of the most troubled eurozone economies, so troubled in fact that the country was demoted to emerging markets status. There was even talk of Greece leaving the monetary union — and not by choice. Those days are behind the country as the economy there is on the mend.
“In the euro-zone, Greece’s economic recovery continues to stand out. Despite the backdrop of a weak Europe, manufacturing continues to rebound into its 27th consecutive month of expansion,” Global X said in a recent note. “Unemployment is falling and GDP recovering steadily, while tourism booms, and the financial sector slowly regains its health.”
At the sector level, GREK is highly cyclical, meaning it depends on the ongoing Greek domestic recovery. This international ETF allocates 46% of its combined weight to financial services and consumer discretionary stocks. Although GREK has been stellar this year, there could be more upside to come as the Greek government implements more reforms.
ProShares MSCI EAFE Dividend Growers ETF (EFAD)
Expense ratio: 0.5%
Dividends should be part of the international investment thesis, particularly with developed market funds because many of those ex-U.S. regions feature higher yields than domestic equity benchmarks. Additionally, some developed markets including the United Kingdom and Switzerland, have rich histories of dividend growth.
The ProShares MSCI EAFE Dividend Growers ETF (BATS:EFAD) is one of the top avenues for accessing that payout growth. EFAD, which recently turned five years old, follows the MSCI EAFE Dividend Masters Index, a dividend growth offshoot of the aforementioned MSCI EAFE Index. EFAD’s index has a strict requirement of at least a decade of increased dividends.
The emphasis on dividend growth over yield gives this international ETF a quality feel. It also steers investors away from high-yield stocks that could be at risk of cutting their payouts in the future. EFAD’s current yield of 2% implies ample runway for dividend growth.
The U.K. and Japan combine for over 41% of this international ETF’s geographic weight. In the case of Japan, that’s a low-yielding market that’s home to dozens of cash-rich companies where dividend growth has only recently become a priority. This indicates the world’s third-largest economy could be a significant driver of payout growth for EFAD going forward.
FlexShares Emerging Markets Quality Low Volatility Index Fund (QLVE)
Expense ratio: 0.4%
One of the newest entrants to the field of international ETFs, the FlexShares Emerging Markets Quality Low Volatility Index Fund (NYSEARCA:QLVE) debuted in July. As its name implies, the new fund combines two popular investment factors: low volatility and quality. Both can be efficacious in emerging markets.
QLVE follows the Northern Trust Emerging Markets Quality Low Volatility Index, which is designed to maximize low volatility exposure. That’s a potentially desirable trait in an asset class known to be more turbulent than developed-market equities.
This ETF also offers more balance than standard, rival emerging markets funds. That’s because it features more mid- and small-cap exposure (over 46% of QLVE’s combine weight) and more geographic diversity.
QLVE is underweight in China relative to the MSCI benchmark and features large weights in Taiwan and South Korea. Those are two countries that are usually among the least volatile emerging markets.
Todd Shriber owns shares of VWO.