The Best Value in Foreign Markets: ETFs

In the massive downdraft that has hit just about every asset class in the past year, foreign and emerging-market investments have been hit particularly hard. Indeed, foreign mutual funds and exchange-traded funds (ETFs) were among the worst performers in 2008, as investors, concerned about a global economic meltdown, raced for the exits.

It soon became apparent, however, that some foreign economies, bolstered by strong internal demand and aggressive central bank initiatives, would emerge from the crisis quickly, and foreign and emerging markets in the past few months have been back among the best performers, with investors plowing a net $9.9 billion back into international ETFs in the first six months of 2009.

I don’t think that trend is over, and believe it’s time to take a look at international stocks as a way to rebalance your portfolio.

Just as investors are finding their way back into international markets, they’re retreating from U.S. equities. In the first six months of 2009, they’ve withdrawn a massive $19 billion from U.S. equity–focused ETFs. It’s little wonder: U.S. gross domestic product (GDP) is forecast to decline nearly 3 percent in 2009, while growing minimally in 2010. We’d rather invest where the growth is.

While foreign economies offer better economic growth prospects, you have to be selective. China’s economy is forecast to grow 7.5 percent this year and 8.5 percent in 2010, according to the International Monetary Fund. India’s expected growth trajectory isn’t far behind, at 5.4 percent and 6.5 percent, respectively. On the other hand, export-dependent Singapore is stressed. Its economy shrank 11.5 percent in the first quarter of 2009, with full-year projections of nearly a 10 percent contraction, making it a more speculative investment until global consumer demand picks up again.

Especially attractive are ETFs that track the stock markets of China, India, and their resource-rich suppliers. iShares Xinau China (NYSE: FXI) invests in the largest 25 Chinese companies available to foreign investors. On the supplier side, iShares Australia (NYSE: EWA) allows investors to bet on Chinese and Indian demand for natural resources. Australia’s top three exports are iron ore, coal, and petroleum products—the majority of which are sent to China, Japan, or India. As of late July, FXI is up nearly 40 percent, while EWA is up more than 25 percent.