Smaller Foreign ETFs Beating The Big Boys

International equity ETFs listed in the U.S. have already attracted $104 billion in fresh net assets so far this year. That makes it the most popular asset class with U.S. investors looking to foreign equities for outsized gains relative to the U.S. stock market.

And for the most part, and deliver outperformance is what they’ve done.

Among the investor favorite picks year-to-date are developed-market ex-U.S. giants like the iShares Core MSCI EAFE ETF (IEFA), which has attracted more than $14 billion in fresh net assets this so far year. Its counterpart, the iShares MSCI EAFE ETF (EFA), has seen inflows of nearly $10 billion. The Vanguard FTSE Developed Markets ETF (VEA) has net inflows for 2017 so far of more than $11 billion.

Emerging Markets Popular Too

In the emerging market ETF space, the iShares Core MSCI Emerging Markets ETF (IEMG) has seen net creations so far in 2017 of nearly $12 billion, and the Vanguard FTSE Emerging Markets ETF (VWO) has gathered more than $6.5 billion.

All of these ETFs have outrun funds like the SPDR S&P 500 (SPY) and the iShares Russell 1000 ETF (IWB) notably year-to-date. In the race between developed-market ex-U.S. versus U.S. large-cap stocks, international equities are ahead by at least 5%, as measured by these funds: 

Between emerging markets and U.S. equities, the outperformance is even more pronounced, with emerging market equity ETFs up almost twice as much as U.S. stock funds: 

Hot Money On Hot Ride

If the 15% jump in total assets linked to international equity ETFs this year was fueled by investors chasing outperformance, the good news is that the hot money has been in fact on a hot trail.

However, what’s also clear here is that investors are going for the big, the popular, the highly liquid and the cheapest ETFs in the segment. Because from purely a performance perspective, the blockbuster charts so far this year aren’t linked to these “most popular” ETFs.

Consider that the three-best-performing foreign stock funds year-to-date have attracted only about $575 million in combined assets. One of them has only seen $8 million in net inflows all year. Their performances are packing a punch, but there’s little hot money chasing them.

These funds are certainly a lot smaller than the likes of IEFA and IEMG, and they are also a lot more expensive and narrower in focus. But they are delivering gains of more than 55% each—roughly five times the gains of the S&P 500. They are:

• KraneShares CSI China Internet ETF (KWEB)
• Emerging Markets Internet & Ecommerce ETF (EMQQ)
• WisdomTree China ex-State-Owned Enterprises Fund (CXSE)

China Key Element

KWEB tracks a foreign-equity index composed of overseas-listed Chinese internet companies. The fund, which has $756 million in total assets, has an expense ratio of 0.72%, and trades on average only $15 million a day, with a spread averaging 0.09%. It’s not that cheap to get in and out of this fund, which is relatively expensive to begin with, at $86 per $10,000 invested.

The same can be said about EMQQ, which tracks a market-cap-weighted index of internet-related companies from emerging and frontier markets. This is not an ex-U.S. fund—U.S. represents some 19% of the country allocation—but the driving exposure is China, at about a third of the fund.

EMQQ, which has $252 million in total assets, costs a sizable fee—0.86%. On top of that, the fund trades on average only about $5.6 million a day, at an average spread of 0.11%.

By comparison, IEMG and VWO—much broader in focus, no doubt—each cost only 0.14% in expense ratio and have trading spreads averaging 0.02%. IEMG has $36 billion in total assets and VWO $60.5 billion.

CXSE, too, isn’t the most liquid fund. The $20 million-in-assets ETF trades less than $600,000 a day, on average, with an average spread of 0.45%. CXSE, which tracks an index of Chinese companies with government ownership of less than 20%, and excludes A-shares, has a 0.32% expense ratio.

Some Narrower Int’l ETFs Working Well

In the developed equity space, far narrower-in-focus—and smaller—funds are also shining brightly. Among them, ETFs like the Global X Robotics & Artificial Intelligence ETF (BOTZ) and the SPDR EURO STOXX Small Cap ETF (SMEZ) are rallying sharply.

That’s excluding several single-country ETFs—funds like the iShares MSCI Austria Capped ETF (EWO), iShares MSCI Germany Small Cap ETF (EWGS) and the iShares MSCI Poland Capped ETF (EPOL), each up around 40% YTD, and among the best-performing this year.

Charts courtesy of StockCharts.com

BOTZ has a large allocation to U.S. robotics companies, but its portfolio is led by Japan, with a 43.5% weighting. From a country perspective, BOTZ is a not a developed-market-ex U.S. ETF. Still, its performance as an international equity fund is nothing to scoff at—up 33.4% year-to-date.

BOTZ is less than one year old, and has $314 million in total assets in a portfolio that carries a 0.68% expense ratio, and that trades with an average spread of 0.07%.

SMEZ, which tracks a market-cap-weighted index of stocks from smaller European firms in eurozone countries, has only $15 million in total assets. The fund, which is three years old, trades only about $155,000 a day, with an average spread of 0.19%. SMEZ has an expense ratio of 0.45%.

Between these two funds, BOTZ has actually seen solid net inflows of more than $280 million this year—it seems investors are taking notice. But SMEZ has seen zero net inflows year-to-date.

We can’t really compare the exposure, the sheer liquidity and the low costs of giants like IEFA, VEA, IEMG and VWO to these much smaller, niche-ier international stock ETFs.

But there’s no question that if impressive performance were the only metric that mattered, it’s these smaller ETFs that are truly standing out so far this year.

Contact Cinthia Murphy at [email protected]