One of the themes for 2017 that I am paying very close attention to is the momentum relationship between international and domestic stocks, explains David Fabian, editor of The Flexible Growth & Income Report.
Put simply, most international indexes have underperformed their U.S. counterparts over the last several years, and I’m looking for that trend to reverse.
I have established a position in the iShares Core MSCI Total International Stock ETF (IXUS) to benefit from this opportunity.
This type of broad-based index fund provides exposure to over 3,300 foreign stocks at an extremely low expense ratio of 0.11%. It’s the type of liquid and low-cost fund that works well as both a core holding or tactical trading vehicle.
IXUS has dramatically underperformed the SPDR S&P 500 ETF (SPY) over the last three years. Much of this underperformance has come as the result of the strong U.S. dollar, in combination with muted growth throughout Europe and other regions.
This type of divergence is notable in that valuations of foreign stocks are now significantly trailing that of their U.S-based. peers.
In my observations as an advisor, many investors have turned their backs on international stocks because of their lagging returns.
Additionally, there is a near universal consensus that the U.S. dollar will indefinitely continue its march higher. This creates the potential for an unexpected source of alpha in foreign stocks if this one-sided sentiment makes a turn.
My preference is to initially play a comeback in international stocks through a highly diversified vehicle rather than picking individual stocks, country-specific ETFs, or even regional funds.
The latter options simply entail too much “hit-or-miss” risk that leave you susceptible to failing to participate in the overall trend.
Obviously, the greatest risk with any index-based stock ETF is that the global equity markets experience a slowdown in 2017. That is why a fund like this should be carefully screened for each investors’ risk tolerance and time horizon.
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