The Olympics just got started but I’m already smarter about the world around me. Every two years – for the Summer and Winter games – the opening ceremonies remind me of a few countries I had forgotten about. I’m secure enough to admit I also forget where exactly some of the 206 participating countries or territories can be found on a map.
Given this educational mindset, let’s look at some of the questions ETF-minded advisors and investors need to think about. While many Americans will be rooting for their compatriots, I hope they also give this consideration. Because a home bias can be harmful to a portfolio.
We are highlighting only one ETF per asset manager in the inclusive spirit of the Olympics.
Is Canada or South Korea in the Developed Markets ETF?
The iShares Core MSCI EAFE ETF (IEFA ) and the Vanguard FTSE Developed Markets ETF (VEA ) each have more than $100 billion in assets. However, they perform differently because they are constructed differently.
The largest country exposure for both ETFs is to Japan and the UK. However, VEA’s third largest market is Canada (10% of assets), while its eighth largest market is South Korea (5%). In contrast, IEFA does not own stocks from Canada or South Korea though other iShares international ETFs do. Canada is not part of a continent that the underlying MSCI index IEFA focuses on. Meanwhile, South Korea is classified as an emerging market not a developed country by MSCI.
To Currency Hedge or Not to Hedge?
Some investors may want to overweight a country like Japan or the UK using a single-country ETF. Examples include the Franklin FTSE UK ETF (FLGB ) or the JPMorgan BetaBuilders Japan ETF (BBJP ). However, in recent years a strong US dollar has limited the gains for many international ETFs.
BBJP’s recent five-year annualized total return was 7.2%. In contrast, the currency-hedged WisdomTree Japan Hedged Equity ETF (DXJ ) climbed an average of 22%. DXJ significantly outperformed its peers despite a higher fee. This ETF owns multinational Japanese companies and eliminates the impact of fluctuations between the yen and the dollar. While currency hedging has recently worked, investors need to decide what’s appropriate for the future.
Should You Own Chinese Stocks? If So, Which Ones?
China is the largest emerging market found in most diversified emerging market ETFs even as India’s weighting has been climbing. For example, the SPDR Portfolio Emerging Markets ETF (SPEM ) had 26% of assets in China.
However, Chinese equities have underperformed in the last few years. This caused investors to consider emerging market ETFs that exclude China. One example is the Columbia EM Core Ex-China ETF (XCEM ) which owns hefty stakes in India, Taiwan, and South Korea.
Meanwhile, the KraneShares CSI China Internet ETF (KWEB ) is available for those who want exposure to China but in a targeted manner. Alibaba, JD.com, and Tencent are well-known large holdings in KWEB, but the ETF does not own Chinese banks or energy companies found in SPEM.
Should You Take a Fundamental Approach not a Market Cap Weighted One?
ASML, Nestle, and Novo Nordisk are the heftiest IEFA holdings because these are the largest publicly traded companies in the EAFE markets. However, some ETFs are constructed based on individual or a combination of factors such as low volatility, momentum, quality, and value.
The Invesco S&P International Developed Quality ETF (IDHQ ) and the Goldman Sach ActiveBeta International Equity ETF (GSIE ) are a couple of examples. Via an index approach, these funds are designed to outperform the broader index approaches using criteria that have worked historically.
Would You Rather Have an Active Manager as Your Travel Guide?
The previously mentioned ETFs all track an index intended to be representative of the market and are periodically reconstituted based on select criteria. However, these ETFs do not consider valuation daily when incorporating the stocks.
In contrast, there are actively managed ETFs like the Capital Group International Focus Equity ETF (CGXU ) and the Fidelity Enhanced International ETF (FENI ). These funds can benefit from making discretionary decisions based on the market environment and company fundamentals. However, they can choose incorrectly leading to underperformance.
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