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Top 5 Foreign ETFs of Q2

Sanghamitra Saha
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The global market was subdued in the second quarter of 2018 due to trade war fears, a slowdown in activity and political crisis. Only Wall Street emerged a survivor as evident from a 4.42% three-month return by SPDR S&P 500 ETF SPY.

All-world ETF iShares MSCI ACWI ETF (ACWI) added only 1.2% during that time frame whiletheAsia ETF iShares Asia 50 ETF (AIA) was off 7.7%. iShares MSCI Emerging Markets ETF (EEM) shed about 9.6%, iShares MSCI Japan ETF EWJ declined about 1.2%, Vanguard FTSE Europe ETF VGK was down 1.3% and iShares MSCI Eurozone ETF EZU retreated more than 2.8%.

What Led to the Somber Q2 Story for International Market?

Developed economies are slowing down this year. The Eurozone grew 0.4% sequentially in Q1, following a 0.7% advancement in Q4 of 2017. The IHS Markit Eurozone Composite PMI for June marked the second-weakest expansion witnessed over the past 17 months (read: Negative News Flow Puts Eurozone ETFs in Focus).

Canada GDP grew 0.3% in the first quarter, after an uptick of 0.4% in each of the last two quarters. It was the most sluggish expansion since the second quarter of 2016. Meanwhile, the Japanese economy saw its first contraction in Q1 since the December quarter of 2015.

While there were some region-specific headwinds, escalating trade tensions between the United States and several other countries were a major deterrent. As part of his protectionist agenda, Trump first slapped steel and aluminum import tariffs on China, Canada, Mexico and the EU. But the main battle has been against China.

Both the parties will now enact a 25% tariff on each other’s $34 billion worth of goods starting Jul 6. Needless to say, such an aggressive course of action had an adverse impact on several areas of the investing world (read: Trump Tariffs Put These Sector ETFs & Stocks in Focus).

Global growth expectations started dwindling. Per the World Bank, growth in advanced economies is likely to slow slightly to 2.2% in 2018 and moderate further to 2% next year, with central banks gradually exiting the easy-money era. The bank, however, cautioned about downside risks emanating from rising trade protectionism.

The World Bank expects growth in emerging market and developing economies to strengthen to 4.5% in 2018 before touching 4.7% in 2019. While growth pictures have been better in emerging economies, the bloc was hit by rising rates in the United States and trade war tensions in Q2.

Equities in developing nations saw acute selloffs, mainly in Q2. The MSCI Emerging Markets Index tanked to the lowest in 10 months, per Bloomberg (read: $8 Trillion Worth of EM Stocks in a Bear Market: ETFs to Play).

The Shanghai Composite Index plunged 20% in late June from the peak achieved in January, confirming a bear market. Countries like Pakistan, Philippines, Turkey and Dubai also saw their equity gauges in the bear territory (read: Trade, Fed & Oil Wrote Top ETF Stories of 1H).

ETFs in Focus

Against this backdrop, below we highlight a few international ETFs that have surpassed SPY (even though by a small margin) in the past three months (as of Jun 28, 2018).

Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) – Up 5.76%

Franklin LibertyQ International Eq Hedged ETF FLQH – Up 5.23%

WisdomTree International Hedged Qual Dividend Growth ETF IHDG – Up 5.20%

iShares Adaptive Currency Hedged MSCI EAFE ETFDEFA – Up 4.94%

Legg Mason Intl Low Volatility High Dividend ETF LVHI – Up 4.46%

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-JAPAN (EWJ): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
LM-INT LV HD (LVHI): ETF Research Reports
WISTR-INT HDG (IHDG): ETF Research Reports
VANGD-FTSE EUR (VGK): ETF Research Reports
DEUTS-XT MS HDG (DBEF): ETF Research Reports
ISHARS-ASIA 50 (AIA): ETF Research Reports
FL-INT EQT HDG (FLQH): ETF Research Reports
ISHRS-ACH MS EA (DEFA): ETF Research Reports
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