Foreign ETFs Offering Better Value Than U.S. ETFs
Pacific Park Financial Inc. | May 22, 2014 06:00AM ET
Last week, redemptions in the ETF space involved $5.0 billion from S&P 500 proxies as well as $3.7 billion from the small-cap arena via the iShares Russell 2000 Fund (ARCA:IWM) alone. Market participants also appear to be selling into strength; that is, investors bid adieu to another $200 million of S&P 500 ETFs during the Yellen-inspired stock rally of Wednesday, May 21. Block traders liquidated roughly $80 million of IWM.
The size of the outflows themselves are not particularly alarming. The aggregate net redemptions from funds like S&P 500 SPDR Trust (ARCA:SPY), Vanguard S&P 500 (NYSE:VOO) and iShares Russell 2000 (IWM) barely amount to a few percentage points of each funds' total assets under management. In other words, a stampede for the exit door has yet to occur.
Nevertheless, as money slowly drips out of U.S. stock assets, net creations for foreign equities is on the rise. For example, iShares MSCI Emerging Markets (ARCA:EEM) has picked up nearly $5.0 billion in the second quarter so far. That increase in demand is showing up in the price outperformance of emergers over domestic stocks. The EEM:SPY price ratio is hinting at a shift that briefly showed promise at the tail end of 2012, yet ultimately faded. Will EEM:SPY finally break through and hold above a long-term trendline, offering super-sized price appreciation for the advocates of developing regions?
If developing economy investments are making a comeback, one might anticipate the largest price gains to come from the smallest and most battered emerging market ETFs. Small-company emergers in India and Russia have had the most success in outhustling both EEM and SPY over the last two months.
One reason that certain small-cap country funds have done remarkably well over a short-time period may be attributable to geopolitical factors. India’s recent election of a pro-market reformer has been a boon for Market Vectors India Small Cap (NYSE:SCIF), while an easing in Ukraine tensions has propped up Market Vectors Russia Small Cap (NYSE:RSXJ). Another factor? Both began the second quarter with several of the lowest price-to-earnings ratios of any stock ETF in the entire universe. While RSXJ may still lay claim to a trailing 12 month P/E below 6, the rapid price appreciation for SCIF has likely pushed its P/E north of 13. Still, it appears to be a worthy competitor to IWM, the ultra-expensive U.S. Russell 2000 proxy. The trailing 12-month P/E for the Russell 2000 is north of 100.
Get The News You Want
It may be too difficult for many to accept the idea that emerging market small caps could be safer risk-reward prospects than U.S. small-caps. On the other hand, it should not be too challenging to recognize the strong possibility that now is the time to shop abroad. Look for funds — large or small — with relatively low price-to-earnings ratios as well as technical uptrends.
For instance, iShares MSCI South Korea (ARCA:EWY) traded at a price of 65 roughly three years earlier. It still trades at a similar price point. In essence, you can purchase EWY for the same price as you would have paid three years ago, but with a whole lot more corporate earnings from the index components. The current P/E is approximately 10 and the asset boasts a solid technical uptrend above its 200-day trendline.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.