3 Reasons Foreign Stock ETFs Can Outperform U.S. Peers

ETF Trends

Some media writers have expressed little surprise by the extent of the run-up in U.S. stocks. It’s one thing to be bullish. It’s quite another to look at 28% year-to-date gains for the S&P 500 as customary.

Super-sized annual percentage jumps occur more frequently in the initial year of a bull market . That’s why one can look upon the 38% in 1975, 26% in 1991, the 26% in 2003 and/or the 23% in 2009 as commonplace. Yet a 28% rise in the fifth calendar year of  a stock bull? One would have to regard the move as having more in common with the irrational exuberance of the latter half of the 1990s.

That’s not to say that the monster move to the upside here in 2013 is entirely without reason. The U.S. Federal Reserve has given global investors plenty of ammunition for remaining long U.S. stocks. Nevertheless, the premier opportunities going forward may reside with risk assets that are not only trending higher, but also have additional advantages.

Here are three justifications for shifting some cash and/or U.S. stock dollars over to foreign stock ETFs:

1. Value .  U.S. corporate earnings have been slowing in recent quarters. Sales have been flat. Meanwhile, share prices have soared through the proverbial roof.

On the flip side, corporate earnings in places like the United Kingdom are rocketing. An investor can tap UK potential with iShares United Kingdom (EWU). A series of “higher highs” for EWU has essentially confirmed a strong uptrend since July.

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EWU YTD 200 MA

EWU YTD 200 MA

The concept of valuation vis-a-vis corporate profits also favors foreign developed equities. On forward estimates of earnings, the Stoxx Europe 600 Index chimes in with a P/E ratio of 13.7; Factset tags the S&P 500 with an optimistic 15.1 based on estimates for the next 12 months of earnings. For those who place more value on trailing 12 months profits, SPDR EuroStoxx 50 (FEZ) currently shows a P/E of roughly 14; Biryini Associates pegs the trailing 12 month P/E estimate at a lofty 18.5. In sum, foreign developed stocks might be trading at a discount of anywhere from 10%-30%.

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