Ex-US Funds Soared in November

International market exchange-traded funds are on a tear, outpacing U.S.-focused funds over the past 30 days thanks in part to the rising dollar making developed overseas markets more attractive.  

For example, among Vanguard’s broad regional ETFs way out ahead of stock index funds are the $102 billion Vanguard FTSE Developed Markets ETF (VEA) and the $67 billion Vanguard FTSE Emerging Markets ETF (VWO). Both have been leaving the $272 billion Vanguard Total Stock Market ETF (VTI) in the dust since late October.  

While 30 days is a short period for evaluating an investment’s performance, international funds have been laggards over longer time horizons.  

The rally comes as overseas stocks have fallen further than U.S. counterparts and are relatively cheaper, said FlexShares Senior Investment Strategist Chris Huemmer. Also, the euro is gaining after falling for much of the year, boosting developed countries’ economies, he noted. 

“As the U.S. dollar falls, developed markets are more attractive to U.S. investors,” Huemmer said, adding that regarding falling prices of overseas stocks, “there was more room for some of these markets to kind of come back.” 

The recent rally may also be due to international funds’ heavy concentration of energy-related investments and lighter holdings in technology—which has slumped in U.S. markets as measured by the 28% year-to-date decline in the tech-heavy Invesco QQQ Trust (QQQ).  

Each of the three Vanguard funds has declined this year by different degrees. VTI, the stock index fund, is down 16%, while VWO has lost 20% and VEA is down 14%. Longer term, international funds trail the U.S. by a wide margin. The annualized 10-year return of 13% for VTI is significantly more than the 5.6% and 2% for VEA and VWO, respectively.  

Still, some professionals tell investors to put money into international funds. 

A fact sheet provided by BlackRock looks at data as of the end of last year to make a case for diversifying among developed markets.  

It finds that developed ex-U.S. stocks, as represented by the MSCI EAFE Index (which also excludes Canada), outperformed U.S. stocks during nearly half of all return periods for the prior 50 years. The fact sheet also notes that “international stocks outperformed 94% of the time when U.S. stocks returned less than 6% and 100% of the time when U.S. stocks returned less than 4%.” 

It’s not clear if the 50-year developed market trend noted in BlackRock’s fact sheet will continue this year, but VEA is in the lead year to date, and the $33 billion Vanguard FTSE All-World ex-US ETF (VEU), which combines the coverage of VEA and VWO, is outperforming VTI with a 15% year-to-date decline.  

Contact Heather Bell at [email protected]