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Category: International Investing

Hot Stocks in Hong Kong Are Boosting ETFs Like ‘ENTR’

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Hong Kong-listed equities are on fire this year, aiding ETFs which investors might not readily expect. The ERShares Entrepreneurs ETF (ENTR) is one of them.

ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).

The ETF allocates more than 28% of its weight to ex-US stocks, according to Morningstar data.

“Among her favorites are Autonomous Aerial Vehicles (AAV) maker Ehang, and FinTech company FUTU. Both have exceeded 150% YTD performance with explosive growth that she believes will propel them higher,” according to ERShares, citing COO and Chief Investment Strategist Eva Ados.

ENTR 6 Month Performance

The Right Way to Blend Domestic and International Exposure

“Ados mentions the up to 50% discounted valuations that HK companies experience relative to mainland China and the US. She notes regulatory changes that now allow mainland Chinese investors to move directly into HK, which was not possible before,” according to ERShares.

As Ados also points out, there are some benefits that come with equities exposure in Hong Kong.

“With respect to the US, more investors are attracted to HK for not only the relatively attractive pricing but also the lower risk of being delisted on US exchanges,” notes ERShares. “The combination can sometimes produce exceptional run ups as the recent single-day 300% gain from Kuashou with last week’s IPO. She adds that currency gains only add icing to the cake. She remains bullish for International and Small Cap equities, especially those with a high growth entrepreneurial orientation.”

The Gains Are Abroad. And Not Where You Might Think

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Data confirm investors are pouring cash into international equity funds, a scenario that bodes well for the ERShares NextGen Entrepreneurs ETF (ERSX).

ERSX selects the most entrepreneurial, primarily Non-US Small Cap companies, that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

The unique factor strategy offered by ERSX is ideally suited for investors looking to capitalize on both growth and value opportunities found with ex-U.S. smaller stocks.

“International exchange-traded funds are back in favor,” reports Ari Weinberg for the Wall Street Journal. “The turnaround has been building for months. Following the summer 2020 rally for U.S. stocks, interest in international developed- and emerging-markets stocks picked up in November and December and has surged through February. According to FactSet, international-stock ETFs (excluding “global” funds, which have U.S. exposure), have gathered $31 billion in net new assets in the first two months of this year, compared with $30 billion for all of 2020.”

ERSX 6 Month Total Return

With International Stocks, the Factors Matter

Getting international exposure is a great way to pull in uncorrelated market movements. But at a time when a pandemic has the whole world in its grasp, it becomes quite the challenge.

Many ex-U.S. markets are considered value destinations. ERSX offers quality/value tilts with several of its components holdings.

“The International Monetary Fund is projecting 5.5% global GDP growth in 2021, with growth in emerging markets and developing economies as a group projected at 6.3%, led by India (11.5%) and China (8.1%). Among developed economies, Spain (5.9%), France (5.5%) and the U.K. (4.5%) are expected to grow at a faster pace than the projected 4.3% for advanced economies as a whole. (The IMF estimates U.S. GDP growth at 5.1% in 2021.),” according to the Journal.

Small cap investors already know that looking at equities outside the large cap universe can yield substantial gains, but one area they may not have considered is looking abroad.

ERSX isn’t any old small cap ETF. It blends domestic and international exposure, which is relevant at time when many markets are betting international smaller stocks will top U.S. equivalents. Non-U.S. equities are poised to take flight, and it’s possible that this asset class is in for a substantial period of out-performance.

Why Non-U.S. Small Caps Are Compelling Long-Term Investments

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International small caps are one of the most overlooked asset classes in the ETF investing space. The ERShares NextGen Entrepreneurs ETF (ERSX) is showing investors exactly why this group shouldn’t be ignored.

ERSX selects the most entrepreneurial, primarily Non-U.S. Small Cap companies, that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

“For several years, investors have done well by focusing on megacaps. But over the long term, foreign small- and midsize companies—or ‘smid’—have outperformed other types of companies, particularly in Europe and Japan,” reports Reshma Kapadia for Barron’s.

The Case for ‘ERSX’

International equities have increasingly become an attractive option for investors looking to generate income and pursue higher total return potential. Investors may want to take cues from institutional players today and not wait until 2022 for international allocations.

“In addition to being well-positioned for a recovery, the relative valuation for global SMID stocks is also attractive,” adds Barron’s. “Those foreign stocks are typically cheaper than their U.S. counterparts. Picking small- or midsize stocks can be hard in the U.S.—and even more difficult abroad—so a diversified, index-based approach may be easier for investors.”

Building wealth can be a painstaking process in a world where most are seeking immediate returns. Yet for those brimming with discipline, small increments allocated toward small cap strategies can pay off in the long run.

While small cap value appears to be solidifying, that doesn’t mean small cap growth is going to lag. Fortunately for investors, the ERShares ETF addresses both factors.

ERSX 1 Year Performance

The ERSX ETF: International Small Caps Coming Into Their Own

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Investors usually love domestic small caps. They can wade into their international equivalents with the ERShares NextGen Entrepreneurs ETF (ERSX).

ERSX selects the most entrepreneurial, primarily non-U.S. small cap companies that meet the thresholds embedded in its proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers compelling performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

ERSX offers plenty of benefits in the current climate.

Small cap companies’ nimble nature may position them to quickly evolve to take advantage of structural economic changes. Simultaneously, value stocks have the potential to outperform growth stocks during economic recoveries, with value-oriented industries tapping into pent-up demand created by the pandemic.

ERSX 1 Year Total Return

Global Pockets of Opportunity

With some long-running market trends poised to reverse this year, ERSX is all the more appealing.

“We’d be remiss to ignore the valuation profile of international small-cap value as well. Despite the attention they’ve earned this year, coupled with an impressive performance record, small-cap value stocks around the world still trade at comfortable discounts to their large-cap peers. That tells us that investors are not yet as serious about small caps as they should be, which creates an advantageous opportunity,” according to WisdomTree research.

Increasing the allure of ERSX, international small caps are generally export-oriented, globally-structured, innovative, and have a high to dominant share of a niche market, often one in which the U.S. counterparts don’t compete effectively.

Looking ahead, international equities have increasingly become an attractive option for investors looking to generate income and pursue higher total return potential. Investors may want to take cues from institutional players today and not wait until 2022 for international allocations.

“Even with their auspicious start to the year, international small caps are still lagging U.S. small caps, so the inexpensive valuations of the former should reassure you that they may still have room to rally further without fear of overpaying,” adds WisdomTree.

Should Your Next Investment be Abroad?

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Though 2020 has been a dismal year for most retail and travel company stocks, the same cannot be said for U.S. technology stocks such as Amazon, Tesla and Zoom Video. But how long will this growth trend continue?

All year long, stories have surfaced of global businesses that are thriving in an otherwise uncertain economy. These companies are showing exceptional growth and are, thus far, proving to be excellent investments. In just the past month alone, Non-U.S. equity ETFs have seen investments of over $25 Billion. 

Based on these and other global trends, it is apparent that Non-U.S. Equities, especially Non-U.S. Small Cap funds, are outperforming U.S. equities across the board. 

Here are three key ways that Non-U.S. Small Cap funds can outperform U.S. equities:

  1. Intermarket Reversion
    • The time is right for an intermarket reversion. Over the past 50 years, U.S. Markets typically exceed Non-U.S. markets for periods of approximately 4-5 years before reverting, and then Non-U.S. markets dominate for a comparable period. We are now completing a period of 12-year dominance by U.S. Markets, which is about 2-3 times longer than the typical pattern. Moreover, during this period of 12 years, foreign stocks have significantly underperformed U.S. stocks. The Nasdaq 100 (QQQs) generated over  1000% (SP +400%) while the Shanghai Stock Exchange appreciated only less than 150%.
  2. Tech Rout is Underway
    • In September, Tech stocks experienced a significant correction, with U.S. Large cap Tech dropping more than 10% in a single week. High-flying Tech stocks, such as Tesla, dropped even more. Though clearly some Tech stocks will continue to appreciate, it appears that the U.S. Tech sector as a whole is now fully priced.
  3. P/E Relative Valuation
    • The price-to-earnings ratio of the Non-U.S. Small Caps at 15 is less than a third of the 47 P/E of U.S. small cap stocks. This provides further evidence that Non-U.S. Small Cap funds are currently better relative value.

So what does this all mean for you? How can investors capitalize on the opportunities created by these industries and companies around the world? 

Diversifying your portfolio geographically through ETFs is a critical move that allows you to take full advantage of the current landscape. Now, more than ever, this opportunity is one that shouldn’t be passed up. 

Why it is important to diversify geographically through ETFs now: 

  1. Diversification in the Tri-Polar World (US, China, Euro)
    • Most investors are heavily invested in U.S. Markets and should, instead, consider diversifying their portfolios globally. Though ADRs provide ease of entry, direct investment in local markets better reflects true market opportunities. By employing an investment strategy that not only distributes your capital across multiple US companies, but also across emerging opportunities around the world, you can balance your portfolio in a way that is nearly impossible to accomplish with U.S. equity investments, alone. 
  2. Global Exposure
    • Stock markets outside of the U.S. often move at a different pace than the U.S. market. This gives investors, who are already actively trading in the U.S. Stock Market, the comfort of knowing that a portion of their portfolio is less influenced by potential risks that primarily affect only U.S. Markets (e.g., U.S. Elections). Moreover, the sliding dollar bodes well for Non-U.S. investments. With an overseas investment, the continuing depreciation in U.S. currency implies an added benefit for U.S. investors who can potentially gain from overseas stock appreciation along with the currency benefit.
  3. Expert Management
    • When investors place funds in a Non-U.S. ETF or Mutual Fund, they invest with experts who are experienced in buying and selling foreign stocks. This is important since buying stocks in foreign markets with foreign currency and local traders is often extremely difficult and expensive for individual investors to set up.
  4. Accessibility
    • Non-U.S. Equity ETFs are accessible to all interested investors, with no minimum investment restrictions. The costs tend to be very low and usually amount to an annual cost of less than 75 cents for every $100 invested per year.
  5. Performance
    • The performance for Non-US Equity ETFs has been rising since the Spring of 2020, along with other global markets. Though no one can promise future results, recent evidence suggests that the pendulum has already shifted—with Non-U.S. outperforming US stocks in recent weeks. This trend might very well continue for the foreseeable future.

Newcomers and seasoned investors alike can take advantage of the growth potential of blossoming, global businesses through Non-U.S. ETFs and Mutual Funds. Compared to other investment opportunities—bonds, real estate, gold, etc.— Non-U.S. Equities, especially Non-U.S. Small Cap funds, are well positioned to provide strong future growth.