International vs. Domestic ETFs in 2015

At the beginning of the year, I told Weekly ETF Report readers, as well as subscribers to my Successful ETF Investing newsletter, that I thought 2015 would be the year that international ETFs would outperform domestic ETFs.

So far, that prediction has proved prescient, as a widely held international ETF, the iShares MSCI EAFE Index (EFA), now is up 7.2% year to date.

Contrast that with the relatively meager gains of the benchmark domestic equity index ETF, the SPDR S&P 500 Index ETF (SPY), with its gain of just 2.8% year to date, and you can see that at least for the first two months of the year our thesis calling for international equities to outperform domestic ones has been validated.

Will this trend continue in the remaining 10 months of the year? I definitely think so, and one big reason why is due to the fact that the Federal Reserve has signaled that it will increase interest rates at some point this year. Whether a rate hike happens in June (unlikely) or in September (much more likely), we’re not quite sure. But compared to central banks around the world, the easy money here at home is coming to an end.

Consider that the European Central Bank just started its own version of quantitative easing, and that central banks in Japan, China, Sweden and several other places all are putting the pedal to the metal on easy-money policies.

This disparity between the Fed and the world’s other large central banks is reason enough to think the outperformance of international ETFs vs. domestic ETFs remains firmly on target for 2015.