International equities and related ETFs have long underperformed U.S. markets, but more investors and financial advisors are beginning to take a closer look at global opportunities in 2018.
“U.S. investors have been underweight international equities in recent years, as compared to the historical mean, particularly immediately following the U.S. presidential election” Chris Huemmer, senior investment strategist at FlexShares, said in a note. “However, we’re seeing a transition in investor expectations, as they realize the U.S. is not the sole engine of global growth. A combination of factors – including strong performance of emerging markets, positive global growth predictions, compelling valuations of international equities, and more accommodative monetary policy overseas – make international exposure an attractive allocation heading into 2018.”
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According to a recent survey conducted by Northern Turst’s FlexShares ETFs of more than 250 advisors at the IMPACT 2017 conference in November, half of the respondents revealed they plan on increasing their allocation to international markets in 2018, with only 4% expecting to decrease their international exposure, while 44% will not make any changes.
Nevertheless, advisors still see some risks that could upend their international trade. Around 64% of respondents pointed to geopolitical risks as their top concern when investing internationally, followed by costs 39%, liquidity 25% and regulations 21%.
“Concerns about investing internationally do not appear to limit advisor interest in capitalizing on opportunities abroad,” Darek Wojnar, Head of Funds and Managed Accounts Group, said in a note. “With international growth expected by many to continue, advisors are adjusting their asset allocation models to account for this. In particular, they’re primarily turning towards international-focused funds to gain this exposure.”
Financial advisors continue to favor mutual funds for their international exposure, with 70% investing in traditional fund products while 58% use ETFs and 38% using a combination of both for international exposure.
ETF investors interested in international exposure have a number of options available. Northern Trust’s FlexShares includes a number of smart beta or alternative index-based ETF strategies that focus on international markets. For example, the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEArca: TLTD) stands as a worthy alternative to the typical EAFE-based ETF. The fund features a legitimate “tilt” and it is toward smaller-cap and value stocks using a multi-factor modeling approach that attempts to enhance portfolio risk/return characteristics.
Additionally, the FlexShares International Quality Dividend Index Fund (NYSEArca: IQDF) takes a quality approach to ex-US dividend payouts. IQDF screens for management efficiency, profitability and cash flow. Each company has to show management efficiency, or firms that efficiently deploy capital and make smart financing decisions. Companies with wider profit margins are better positions to grow and maintain dividends than those with slimmer margins. Additionally, firms that can meet debt obligations and day-to-day liquidity needs are better capable of maintaining dividends.
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