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:
- 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%.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.