Will the rally in foreign stocks finally put an end to American investors’ home country bias? Martin explains how ETFs can help make it easy to plant a flag internationally.
Consider these numbers: Markets outside the U.S. represent half of the total value of the 47 developed and emerging stock markets that make up the MSCI All Country World Index (Source: MSCI). Yet more than 80% of U.S. investors hold only domestic stocks, according to Morningstar. We suffer from a chronic case of home country bias, and in the process we may miss a lot of chances to potentially improve the risk/return in portfolios. It’s understandable. With years of supernormal returns from U.S. stock markets, investors with diversified global portfolios may feel fatigued by trailing the U.S. market.
Perhaps the current bull market in foreign stocks will help nudge U.S. investors in the international direction. Many of these markets have seen positive performance throughout 2017. Flows into non-U.S. exchange traded funds (ETFs) have followed suit. Unusually, that growth is occurring across countries and regions.
Trailing 12-month total return ($)
I recently moderated a roundtable discussion with a panel of international investing experts. They included my colleague Gerardo Rodriguez, who managed BlackRock’s emerging markets multi-asset strategies, a representative from index provider MSCI and several asset allocation specialists.
While we briefly covered the upsurge in stock prices, the bulk of our conversation focused on the future. We agreed that this era of globally synchronous growth, while highly welcome, may eventually become more idiosyncratic, potentially creating opportunities within specific countries and sectors. At the same time, we shared a concern that most U.S. investors are poorly positioned to capture these opportunities, as they tend to view international exposures as an in-and-out, “risk play” rather than a long-term strategy.
With that in mind, here are three ways to use ETFs to get more comfortable leaving home.
1. Go broad
If your core portfolio is very concentrated in U.S. stocks, consider building out a broad allocation to developed and emerging markets. Then, step away and don’t touch it except to rebalance once or twice a year. For broad international exposure, consider iShares Core MSCI Total International Stock ETF (IXUS).
2. Get specific with countries and themes
Investing at a country level can be a great way to add diversification or growth potential to a portfolio. It’s worth digging into long-term factors that drive an economy’s growth. For example, countries with attractive demographics like Brazil, or a strong reform agenda like India, may offer opportunities that you can access using a country ETF. Digging even deeper, investors can apply the same level of granularity to international markets that they do to U.S. markets. Smart beta and currency hedged are also available to further diversify your portfolio. For specific countries and themes, consider iShares MSCI India Small-Cap ETF (SMIN) or iShares MSCI Brazil Small-Cap ETF (EWZS).
3. Consider adding foreign bonds
Finally, for those who are skittish about potential volatility abroad, adding international bonds to the mix may help offset equity risk, just as they tend to do in U.S. portfolios. iShares Core International Aggregate Bond ETF (IAGG) and iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) are two to think about.
It remains to be seen whether the return to international is a sea change on how investors view the asset class; we won’t know until the next pullback. My suggestion: Keep the door open. If you’ve come for the rally, consider staying for the long-term possibilities.
Learn more about ways to diversify internationally with iShares.
Martin Small is the Head of U.S. iShares and a regular contributor to The Blog.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
Small-capitalization companies may be less stable and more susceptible to adverse developments, and their securities may be more volatile and less liquid than larger capitalization companies. Buying and selling shares of ETFs will result in brokerage commissions.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by JPMorgan Chase & Co. or MSCI Inc. Neither of these companies make any representation regarding the advisability of investing in the Funds. BlackRock Investments, LLC is not affiliated with the companies listed above.
©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.