International vs. Domestic ETFs

At the outset of the year, I argued that international equity exchange-traded funds (ETFs) likely would outperform domestic equity ETFs. So far, that thesis has come to fruition, with many international equity ETFs up 3-4% on the year while most domestic markets are up just 1-2% year to date.

The chart below illustrates the relative performance of two international stock ETFs — the iShares MSCI EAFE (EFA) and the iShares MSCI Emerging Markets (EEM) — vs. domestic stocks in the SPDR S&P 500 ETF (SPY).

This chart represents the past three years of price action in these markets. As you can see, domestic stocks have been far better performers than international stocks, particularly during the past two years.

Yet due to the cyclical nature of markets, and the relative overvaluation in domestic stocks vs. international stocks, the current environment is, I suspect, more conducive to greater upside in international ETFs going forward when compared to domestic ETFs.

It is also important to factor in that there is no more tailwind of quantitative easing (QE) for U.S. stocks now that the Fed has stopped buying bonds. Yet in Europe, this QE tailwind is blowing strong, as the European Central Bank is just getting its own version of quantitative easing going. This week, we also saw that the Swedish Riksbank (the country’s central bank) announced it was going to be doing some bond buying — and that’s very bullish for international ETFs vs. domestic ETFs.

For some time now, my subscribers have been taking advantage of the action in foreign markets, and we plan to continue doing so based on the aforementioned thesis. If you’d like to do the same, then I invite you to check out my Successful ETF Investing advisory service today.