International ETFs have become increasingly attractive to many investors. Following a strong rally, U.S. stocks now trade at rich valuations, which leave little room for further upside. While some money managers and individual investors are contemplating increasing exposure to corporate bonds and Treasuries, others are looking across the pond for better-value stocks. In fact, Swiss wealth management firm Pictet said that it expected European and Asian equities to perform better than their U.S. peers in the second half of 2023.
Indeed, focusing on valuations, their case looks compelling: the main European benchmark index, Stoxx Europe 600, trades at a TTM P/E of 13, versus the S&P 500’s valuation of 23. On the other hand, the Japanese market is even more overvalued than the U.S. one, after the Nikkei 225 index reached its all-time high on June 16th on strong interest from international investors as well as significant depreciation of the Japanese yen. Based on valuations as well as the “Warren Buffett indicator” (the ratio of total stock market value divided by GDP), analysts see the highest projected annual returns in Asia ex. Japan and Europe, compared to other developed markets.
Whether the pundits are right, or the U.S. market will surprise the naysayers again, like it did many times in the past, it’s always helpful to diversify the investment portfolio. For individual investors, who don’t have the market research and analysis teams that support the investment decisions of professional money managers, the easiest (and the cheapest) way to gain exposure to overseas markets is to buy into an ETF.
Best European ETFs
Vanguard FTSE Europe ETF (VGK): the largest Europe ETF, with Assets under Management (AUM) of $18.8 billion. The fund tracks the FTSE All Cap Developed Europe index to provide exposure to all developed European markets. It holds 1,307 stocks of any market capitalization; however, over 77% of holdings are mega- and large-cap companies such as Nestle SA (NESM), ASML Holding (ASML), LVMH (MC), AstraZeneca (AZN) and Shell (SHEL). Still, the fund also has significant exposure (16%) to mid-cap companies and even some exposure to small and micro-caps. As for the geographical allocation, the largest exposure is to the U.K., France, Switzerland, and Germany. Expense Ratio: 0.11%. Year-to-date performance: +7.4%.
Investors who prefer to stick with less volatile large caps in the foreign markets may instead choose another large European equity ETF: JPMorgan BetaBuilders Europe ETF (BBEU). The fund’s AUM is $8.9 billion; it follows the Morningstar Developed Europe Target Market Exposure Index, designed to cover the top 85% of the float-adjusted market capitalization of European equity markets. BBEU holds 454 stocks; almost 90% of holdings are large caps and the rest are mid-cap companies. The fund’s geographical allocation is similar to that of VGK; the list of largest holdings also closely resembles that of the larger fund. Expense Ratio: 0.09%. Year-to-date performance: +8.0%.
In addition, investors wishing to confine their European exposure to continental stocks only, skipping the volatile U.K. market, can buy into iShares MSCI Eurozone ETF (EZU), which tracks the MSCI EMU index. With an AUM of $8.2 billion and 229 companies’ stocks, the fund offers exposure to some of the largest companies domiciled in the Euro area. EZU’s largest geographical exposure is to France, Germany, and Netherlands; 90% of holdings are large caps and 10% mid-caps. In terms of specific names, the fund’s largest holdings are ASML Holding (ASML), LVMH (MC), SAP SE (SAP), TotalEnergies SE (TTE), and Siemens (SIE). Expense Ratio: 0.52%. Year-to-date performance: +11.0%.
Best Asia & Pacific ETFs
Investors who wish to diversify into the developed markets in Asia, avoiding the overvalued Japanese equities, can purchase shares in the iShares MSCI Pacific ex-Japan ETF (EPP), tracking the MSCI Pacific ex-Japan Index. The fund is one of the veterans in the ETF sphere, active since 2001. It has an AUM of $2.0 billion and holds stocks of 121 large-cap (78%) and mid-cap companies in the region, with the biggest concentration of holdings found in Australia, Hong Kong, and Singapore. The largest holdings of the fund include BHP Group Ltd (BHP), CSL (CSL), ANZ Group Holdings (ANZ), and Macquarie Group Limited (MQG). Expense Ratio: 0.47%. Year-to-date performance: -13.2%.
Another Asia ex. Japan option might be a smaller, more expensive, but much better performing First Trust Asia Pacific ex-Japan AlphaDEX Fund (FPA). The fund tracks a proprietary NASDAQ AlphaDEX Asia Pacific Ex-Japan Index, utilizing quant-based multi-factor screens to identify the stocks poised to outperform their broad peer group. Another unique feature of FPA is that it includes a heavy allocation to South Korea, which other funds consider as an emerging country and therefore exclude. FPA is considerably smaller than other ETFs presented, with an AUM of $17.7 million; however, its holdings of 102 companies are quite diversified across countries and industries. The largest geographical components are South Korea, Australia, and Singapore. Expense Ratio: 0.80%. Year-to-date performance: +8.3%.
Best Global Market ETFs
Investors aspiring for international exposure but unwilling to confine it to specific markets may choose one of the many global developed markets (ex. U.S.) funds. The largest of these funds is Vanguard FTSE Developed Markets ETF (VEA), with an AUM of $113.5 billion. VEA holds over 4,000 stocks in all sectors of all developed markets outside of the U.S. Expense Ratio: 0.05%. Year-to-date performance: +7.4%.
Another large, diversified, and cheap international exposure option is SPDR Portfolio Developed World ex-US ETF (SPDW), with $16.6 billion in AUM and 2,510 holdings. Expense Ratio: 0.04%. Year-to-date performance: +7.1%.
One more broad option is Schwab International Equity ETF (SCHF), with over 1,500 large- and mid-cap stocks from about 20 developed markets – including companies in Canada, which many other ex-U.S. ETFs overlook. Expense Ratio: 0.06%. Year-to-date performance: +7.9%.
The best-performing ETF among the developed non-U.S. funds this year is BNY Mellon Concentrated International ETF (BKCI), an actively managed ETF with an AUM of $75.9 million that doesn’t track an index but uses the MSCI EAFE Index as a benchmark. The fund utilizes bottom-up fundamental research to build a concentrated portfolio of high-conviction ideas, which the fund’s management deems as having strong fundamentals and the potential for sustainable earnings growth. Expense Ratio: 0.80%. Year-to-date performance: +12.2%.
Overseas ETFs – Full of Potential
Investors that are ready to abandon their home bias in search of diversification and the potential for higher share price appreciation than is currently penciled in for the overbought U.S. markets can find abundant opportunities. Exchange-traded funds provide cheap and hassle-free ways to gain broad exposure to global markets. With TipRanks’ ETF Screener and ETF Comparison Tool, it’s as easy to invest abroad as it is to buy a stock of Apple (AAPL).
