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Sound Advice: July 6, 2022

Should international markets be of interest?

Although the U.S. stock market always seems to be on center stage, investing in international markets has continued to grow, especially since the arrival of exchange-traded funds (ETFs), which greatly simplify the process.  It’s no longer a matter of trying to ferret out the details of important companies and untangling the differentials in local currencies.

The simplest of all ways to invest abroad is to buy broad-based, exchange-traded funds that track the performance of specific countries or regions.  The broadest coverage of all would be IXUS, the iShares Core MSCI Total International Stock ETF.  Similar funds are available from Vanguard, Fidelity, and others.

A narrower focus is available through EFA, iShares MSCI EAFE ETF.  EAFE stands for Europe, Australasia, and Far East.  Then there’s EEM, which is an ETF for emerging markets, IEV for Europe, EWJ for Japan, and FXI for China.  There are numerous others, but the essential ingredient in all cases is a substantial level of trading to ensure that there’s a ready market for buyers and sellers.

Over time, these ETFs have typically had valuations 20% or more below those of the U.S.  There have been extended periods when they substantially outperformed domestic stocks and others when they lagged far behind.  In the half decade prior to 2022, when the U.S. market soared, foreign markets were far behind.

So far this year, however, the picture has brightened for investing abroad, but the undervaluation persists.  Even so, an interesting differential has developed.  With one exception, the international ETFs noted above turned in similar returns.  The exception was the pattern of FXI, the ETF for China, which perhaps due to the country’s strict lockdown approach to the pandemic experienced a far steeper market downturn until early spring this year.

Then things changed, China’s economy started to perk up and so did FXI.  Unlike the other international ETFs and the Standard & Poor’s 500 Index, all of which are still far down in the teens for the year to date, FXI has climbed from a shortfall of more than 20% in early May to a deficit of only 5% in current trading.

Given what may be viewed as the more limited transparency of international companies and contrasts with non-U.S. accounting methods, the leaner valuations abroad are understandable.  Still, there are more than a few parts of the world where the future growth rates will exceed those of mature economies.  More rapid growth often goes hand in hand with stronger market returns. 

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883


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