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How ETF Strategist Accuvest Finds the Strongest ex-US Markets

This article was originally published on ETFTrends.com.

It is not a stretch to say that, by now, most investors know that last year was hard on international stocks and the related exchange traded funds (ETFs). When 2018 drew to a close, the MSCI EAFE Index was down 13.80 percent while the MSCI Emerging Markets Index was lower by 15.30 percent.

As has been the case following previous environments of weakness by international stocks, the 2018 malaise was accompanied by a bevy of calls that ex-US markets are attractively valued and poised to rebound in 2019. Those are broad statements and there is still ample time left in the year, but to start 2019, the MSCI EAFE Index and the MSCI Emerging Markets Index are up 4.60 percent and 6.60 percent, respectively.

Knowing that a particular asset class is compelling on valuation or poised to rebound is instructive, but when it comes to international investing, those assessments only go so far. Accuvest Global Advisors, a California-based asset manager and ETF strategist, includes among its solutions the Country First strategy. Country First includes a tactical strategy, global and international core offerings, an emerging markets offering and the Asia Advantage Equity strategy.

Single-country ETFs are the foundations of the Accuvest strategies and the firm has the industry's longest documented track record of using such funds.

Accuvest President and Chief Investment Officer (CIO) David Garff talked with ETF Trends about where his team is finding opportunities outside the U.S.

A Discerning Approach

“Our Country First investment strategies are based on three key beliefs:  First, country selection offers meaningful return opportunities to global investors,” said Garff. “Second, multi-style investing improves the risk-return of a global portfolio.  Third, ETFs are the most efficient way to get exposure to markets of individual countries.”

Country First's starting point is the MSCI ACWI Index, giving the strategy exposure to 99% of world equity market capitalization. The first step is selecting countries with a liquid single-country ETFs and reliable monthly data. Next, Country First analyzes over 20 factors in groups broken down by fundamentals, momentum, risk and valuation.

“Third, we rank each country’s relative attractiveness based on the factor data,” adds Garff.  “Fourth,  we create portfolios and rebalance them monthly in accordance with our new country ranking model. Our portfolios are constructed using single-country ETFs in order to minimize single-security risk and provide low cost, diversified exposure to a country’s equity market.”

An “Eclectic Group”

Due to the fact that the MSCI ACWI Index includes the U.S. among its geographic exposures, Accuvest's Country First strategy can include the U.S. among its preferred destinations. The iShares MSCI ACWI ETF (ACWI) , the ETF tracking the MSCI ACWI Index, currently allocates 55.40 percent its weight to the U.S.

Other countries currently in the Country First fray include some of last year's worst performers as well as some ex-US standouts.

“Our current composite rankings have countries like Russia, Poland, Norway, the U.S., Sweden, Israel, Korea, Taiwan, Chile, Turkey, Hong Kong and Japan in the top 12,” said Garff. “It’s a pretty eclectic group.”

Eclectic and arguably, to some extent, controversial. Last year, the iShares MSCI Turkey ETF (TUR) plunged 41.50 percent amid a currency crisis and strained geopolitical relations with the U.S. Thanks to tumbling copper prices, among other factors, the iShares MSCI Chile Capped ETF (CBOE:ECH) shed 19 percent in 2018.

While 2019 is in its early innings, some of last year's laggards are rebounding. The Turkish government has also implemented a new economic program with lower growth targets as a response to the current market environment. TUR is up 13.50 percent year-to-date while ECH is higher by 9.50 percent.

On the developed markets side of the ledger, Country First could benefit from rebounds by the iShares MSCI Sweden ETF (EWD) and the iShares MSCI Israel Capped ETF (EIS) . Those two ETFs, both of which declined last year, are up an average of 5.40 percent to start 2019.

Country

Rank

Fundamental

Momentum

Risk

Value

Russia

1

6

6

30

1

Poland

2

26

9

6

6

Norway

3

16

15

1

21

United States

4

3

3

16

31

Sweden

5

10

19

3

23

Israel

6

24

2

18

18

Korea

7

13

32

13

4

Taiwan

8

14

14

17

17

Chile

9

12

24

15

15

Turkey

10

2

29

35

2

Hong Kong

11

27

12

8

16

Japan

12

21

13

23

9

Chart Courtesy: Accuvest Global Advisors

Following The Data

Another cornerstone of Accuvest's Country First strategy is to not be reactive to events like Brexit or shifts in monetary policy by global central banks. Rather, Country First lets the data lead the strategy, which bolsters consistency.

“Clearly, the last 5 years have been a time to try to get the macro calls correct,” adds Garff. “That said, we don’t really focus on things like Brexit, or try to predict changes in monetary policy.   We have to let the data lead us to the best relative value opportunities.  That’s the only way for us to have a consistent, disciplined and repeatable process in what has become a pretty wild global equity market.”

Accuvest  is a participant in the  ETF Strategist Channel .

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