Investors around the world would now have a preference for foreign – particularly European – equities over domestic US stocks. Volumes of Exchange Traded Funds (ETF) have shown investors’ growing interest in European and Emerging Markets ETFs.
For example, the iShares Core MSCI EAFE ETF (IEFA, up 17.82% YTD) is the second most popular ETF of the year 2017, bringing in USD 11.3 billion in net inflows; and the iShares Core MSCI Emerging Markets ETF (IEMG, up 23.99% YTD) drew USD $11.1 billion in net inflows YTD.
The former focuses on developed economies including Japan, Europe and Australia while the latter focuses on Emerging Markets (EM) stocks from several BRICS countries like China, India, Brazil and from non-BRICS countries like ROK, Taiwan. According to Cyceon analysts, there are two main reasons behind this investment trend.
Firstly, there are the record-breaking levels of the US stocks markets that make one think they could be overvalued already or that one should rather hold while diversifying part of one’s portfolio by seeking healthy growth outside the USA.
Secondly, the composition of these ETF looks more and more like US-based ones with fast-growing, advanced technology companies like ROK’s Samsung, China’s Tencent, Alibaba, Baidu in the IEMG ETF and with robust, blue chips like Switzerland’s Nestle SA, Japan’s Toyota and France’s Total SA in the IEFA ETF.
However, Cyceon pointed out, when one buys the IEMG ETF one should think about counterbalancing its significant exposure to China – 26.23% of the ETF portfolio – and its financial sector that could be a more shaky area as China’s entering a “new normal” with lower economic growth rates.
With a P/E ratio at 18.06 and 15.08 for the IEFA and IEMG ETFs respectively, there might be room for upside potential compared with a P/E ratio at 22.10 and 20.38 for the iShares Core S&P 500 ETF (IVV, up 11.69% YTD) and the iShares Russell 2000 ETF (IWM, up 7.04% YTD) respectively.