2013 has been a very rocky year for international investing. Emerging markets have struggled across the board, while developed markets began the year on a solid note, but lost their footing and are now facing a period of uncertainty with earnings season approaching.
This situation could definitely continue in the near term as the dollar remains strong and concerns are ever-present over the longevity of the Fed’s bond buying program. These two items are making it very hard for some to risk their capital in foreign markets, as many are instead looking to keep their investment in the domestic sphere instead.
While many have likely abandoned international investments as a result of this trend, there are still plenty of good values out there. In particular, there are several top ranked ETFs which could be well-positioned to outperform in the months ahead.
That is because a trio of these ETFs have actually been able to fight through the bearish trend and still trade in positive territory for the trailing three month period. While this might not sound like much of an accomplishment, it is important to remember that in the same time frame EFA has added just 0.9% while broad emerging market funds like EEM and VWO are nearing a double digit loss for the period (see 4 ETFs on the Move After Bernanke Press Conference).
Clearly some have been able to break out of this downward channel and hold their own, suggesting that all funds haven’t been sucked into the whirlpool of negative returns. So before you write off all international ETFs for the time being, consider taking a closer look at these resilient, top ranked ETFs first:
PowerShares Golden Dragon China Portfolio (PGJ)
Many China ETFs, such as the ultra-popular FXI, have been facing severe weakness lately. This is because there have been a number of poor data points for the country’s economy in a number of key sectors.
However, not all China ETFs have succumbed to this weakness, as a few have managed to perform rather admirably. In particular, PGJ has done quite well, adding significantly over the past three months.
Part of the reason for this outperformance is PGJ’s focus on ADRs and technology firms for its exposure. This has eliminated some of the panic selling issues that we have seen in Chinese markets, while the big holdings in technology, health care and consumer discretionary have been far better choices than the rocky Chinese financial market.
Given this, a look to PGJ might not be a bad idea for international ETF investors, and especially those looking for a China allocation. The fund sees decent volume and is actually cheaper than FXI despite holding more securities in its portfolio (roughly three times more firms in the basket).
Currently PGJ has a Zacks ETF Rank #2 or Buy, suggesting that this outperformance could continue (see all the Top Ranked ETFs).
First Trust Switzerland AlphaDEX Fund (FSZ)
Europe has actually been a decent performer during the recent slump, as many of the funds targeting this region have held up rather well. In fact, several major countries, like France, Germany, and the UK, have all seen price increases in the last three months, suggesting they have avoided the worst from the recent slump.
Beyond these markets, another interesting choice is in Switzerland. The country maintains some level of currency independence—still pegged to the euro despite having its own currency, the franc—while it isn’t dragged down by broader euro zone woes.
This allows the country to potentially outperform some of its counterparts, or if the euro zone continues to come back, rise as well. This has certainly been the case lately, as some Swiss ETFs have paced the broad American market during the trailing three month time frame.
One of our favorites in this regard is FSZ, an ETF from First Trust. The fund uses the AlphaDEX methodology to select stocks, so while it is a bit pricier than most, it does potentially eliminate the worst rated stocks, allowing FSZ to possibly outperform (see 3 European ETFs Holding Their Ground).
FSZ also has a Zacks ETF Rank of 2 or Buy, suggesting that their process has done quite well lately, and that more outperformance could be ahead for this fund.
iShares MSCI Malaysia Index Fund (EWM)
Many Southeast Asian markets were up to start 2013, but Malaysia, thanks to electoral uncertainty, struggled. Many thought that the ruling party was going to lose its majority, but the results were strongly in favor of the Prime Minister Najib Razak and his coalition, which won another five year term.
Thanks to this reduction of uncertainty, the Malaysia ETF soared, posting solid gains immediately following the event. And since EWM had missed much of the run up to start the year, it wasn’t as hit by the recent sell-off which devastated the country’s counterparts in the Philippines and Thailand.
It also helps that Malaysia has a very balanced ETF, and decent sector diversification, though financials do take up about 30% of the portfolio. However, the big technology focus of the economy, along with decent sized exports of oil products, has helped it to avoid the worst of the slowdown as well.
Plus the timing of the election couldn’t have been better, and likely saved EWM from the broader regional issues this time around (read Time to Buy the Top Ranked Malaysia ETF?).
This fund also is a top performer from the Zacks ETF Rank perspective, as it has a Rank of #1 or Strong Buy, suggesting that it will continue to be a good choice in the space.
Global markets have been extremely weak, as talk of Fed tapering and a strong dollar have pushed down demand for international assets. And with the specter of the Fed hanging over the market—especially with the decent U.S. economy-- this issue may be present for a bit longer.
Still, there have been several international markets which have fought through this trend and have actually been doing pretty well in this environment. These top ranked ETFs could thus be great choices for investors seeking to stay in global markets, but are looking to avoid the worst and stick with the best positioned funds out there.
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Author is long EWM
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