Best, Worst International Stock ETFs for First Half of 2023

The top 10 international stock exchange-traded funds for the year’s first half included comebacks for markets such as Greece, Argentina and Japan, while six of the bottom 10 performers focused on China, which has struggled to recover from the pandemic. 

The top-performing international stock ETF by year-to-date total return was the Global X MSCI Greece ETF (GREK), returning 35.2% year to date through June 27. The bottom-performing fund was the iShares MSCI Turkey ETF (TUR), having dropped -21.5%.  

For context, U.S. markets, represented by the SPDR S&P 500 ETF Trust (SPY), rose 14.1% over that period, handily topping the rest of the world, represented by the iShares MSCI ACWI ex U.S. ETF (ACWX) which gained half that amount. 

Breaking down the international markets, the Vanguard FTSE Developed Markets ETF (VEU) returned 10.3% compared to the Vanguard FTSE Emerging Markets ETF (VWO)’s 5.0%.  

“Developed Markets had a good first half in terms of performance and pulling in assets, but emerging markets continued to have mediocre returns,” said Bryan Armour, Director of Passive Strategists Research, North America, at Morningstar. 

Emerging Markets 

However, emerging market returns may be deceiving, as China makes up about a third of the FTSE Emerging Markets index, and its market has fallen into bear territory this year. The iShares MSCI Emerging Markets ex China ETF (EMXC) is up 10.4% this year. 

The top 10 funds all highlight countries whose markets have been depressed by high borrowing costs, slow growth or political factors, and now seem to be showing signs of increased growth. The bottom 10 is dominated by Chinese funds, which have suffered as growth from China has not been as strong as expected this year. 

The top and bottom 10 international stock ETFs were chosen based on their year-to-date total performance as of market close on June 27, 2023. After excluding inverse funds, leveraged funds, and funds with fewer than $50 million in assets under management, there were 314 total ETFs in that category that trade on U.S. markets.  

Top 10: Comeback Kids 

Greece has been a poster child for economic dysfunction for years. While it became the first developed market country to be downgraded to emerging market status in 2013, it’s recently turned around. 

A big factor is the reforms undertaken by the current New Democracy party to boost tax collection as well as cut costs. Credit rating agencies are considering upgrading Greece’s sovereign debt to investment-grade status.  

An upgrade will lower the cost of capital not just for Greece’s government, but for its companies as well. “It’s rare for a company to have a higher credit rating than its sovereign,” said Malcolm Dorson, head of emerging markets strategies for Global X. Another factor helping Greece’s economy this year is the return of travel bookings to 2019 levels, as tourism makes up 20% of Greek GDP. 

The Global X MSCI Argentina ETF (ARGT) came in second place, with returns of 33.6%. 

“Besides coming off a low base at the beginning of the year, inflation is 100% or more, so savings accounts are negative in real terms, so people are pouring money into equities as an inflation hedge,” Dorson explained. 

Argentina recently made a $2.7 billion payment to the International Monetary Fund showing that it will stave off default. Between this and the likely election of a president from a new party in upcoming elections, there’s hope Argentina can stave off default, which would massively increase borrowing costs for the country if it happened.  

Currency-hedged Japanese stock funds make up four names on the list, including the third-place WisdomTree Japan Hedged Equity Fund (DXJ). Japan has, unlike much of the world, benefited from rising inflationary pressure as the country has struggled with deflation for years now. In addition, for fiscal year 2023, which ended in March for Japan, firms had their highest level of share buybacks in well over a decade.  

Best-Performing International Stock ETFs

Bottom 10: China’s Slump 

China funds made up a majority of the bottom 10 list. After a stronger start to the year with the easing regulation on tech and the property market, as well as the end of its Zero COVID policy, investors were expecting a return to growth.  

“It seemed like when they reopened, their economy was going to shoot out of a cannon, but it really underwhelmed investors,” said Bryan Armour, Morningstar’s director of passive strategies research for North America. 

The worst-performing overseas ETF was TUR, having fallen 21.5%. The fund nearly doubled last year as officials slashed interest rates despite runaway inflation.  

Worst-Performing International Stock ETFs

Second-Half Outlook

 For the back half of the year, there may still be value left in international markets.  

“Developed markets specifically in tech and the U.S. are trading well above historical average in terms of valuations, while emerging markets besides China are trading below their five-year average discount compared to developed markets,” noted Dorson.  

Armour echoed his sentiment, saying that “emerging and developed markets are still compressed versus the U.S., investors want to use this as an opportunity to diversify their portfolio.” 

 
Contact Gabe Alpert at [email protected]