It has long been said that international equities, including developed markets, are more attractively than their U.S. counterparts. Various data points confirm as much.
“On valuations, it is important to note that the market entered February with multiples at multi-year highs,” said BlackRock in a recent note. “The S&P 500 ended January at nearly 23 times trailing earnings. Outside of the immediate aftermath of the financial crisis, when earnings were depressed, this is the highest multiple since the early 2000s.”
Although the S&P 500 has declined since February, bringing it to a year-to-date loss of 0.8 percent, it still trades at a lofty 21 times earnings. More compelling valuations are seen overseas and that might be why investors are eagerly running to international exchange-traded funds.
Better Performance, Too
Not only are international stocks more attractively valued than their U.S. rivals, they're outperforming the S&P 500. Year-to-date, the iShares MSCI ACWI ex U.S. ETF ACWX and the iShares Core MSCI EAFE ETF IEFA are up 0.3 percent and 0.6 percent, respectively.
The $3.20 billion ACWX is a mix of developed and emerging markets stocks, but Japan and the U.K. combine for over 28 percent of the fund's geographic weight and seven of the ETF's top 10 geographic exposures are developed markets. Even with its emerging markets exposure, ACWX has been less volatile than the S&P 500 this year and developing economies, broadly speaking, still trade at lower valuations than U.S. stocks.
China, South Korea and Taiwan combine for 14.3 percent of ACWX's weight.
Depending On Developed Markets
While developed markets ETFs, such as IEFA, are outperforming U.S. benchmarks, stocks in major markets outside the U.S. are inexpensive.
“Developed markets outside the U.S., as tracked by the MSCI ACWI-ex U.S. Index, is trading for roughly 15 times trailing earnings, the cheapest since late ’15,” said BlackRock. “Right now with the U.S. being still the most expensive market and the epicenter of uncertainty, non-U.S. equities offer better value, and perhaps better protection.”
Year-to-date, investors have added $14.79 billion in new assets to IEFA, more than double the amount added to the second-best ETF on an asset-gathering basis.
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