Where ETF Investors Should Look outside the US
Large U.S. company stocks are beginning to look pricey relative to their historical trends as the ongoing bull market rally pushes into its ninth year. Consequently, investors may consider potential exchange traded fund opportunities outside of U.S. large-caps.
On the recent webcast (available On Demand for CE Credit), Opportunities Outside of U.S. Large Cap Companies, Salvatore Bruno, Chief Investment Officer and Managing Director of IndexIQ, pointed out that the global economic outlook is improving, with forecasts showing growth around the world is improving and broadening, especially in Southeast Asia.
“Growth is steady and improving in key areas outside the U.S.,” Bruno said.
Along with the growth prospects, investors may also find better value in global markets. Looking at 12-month forward price-to-earning ratios, the S&P 500 is relatively pricey compared to international benchmarks. The S&P 500 was trading at a 17.7 P/E as of the end of June, compared to its 15.4 30-year average. In contrast, the MSCI Europe was trading at a 14.8 P/E, compared to its 14.0 P/E 30-year average. The MSCI Japan was hovering around a 14.4 P/E, compared to its 27.8 P/E 30-year average. The FTSE World ex U.S. showed a 14.2 P/E, compared to its 16.2 P/E 30-year average.
Earnings growth will also further support market prices in global markets. For instance, trailing earnings have rebounded on the Euro Stoxx 50 Index while forward earnings push higher.
“Growing earnings may continue to provide a tailwind for European equities,” Bruno said.
However, as more look to global opportunities, investors should keep in mind potential currency risks that come with international investing.
“Currency valuations tend to revert to the mean over long periods of time, but fluctuate dramatically during shorter periods — increasing the impact of currency movements,” Bruno said.
Due to the currency fluctuations and the predictable nature of the foreign exchange market, it is difficult to pinpoint the best times to use a completely hedged or unhedged investment approach. Bruno warned that missed opportunities due to sharp currency swings have historically led investors to chase after performance through either fully hedged or nonhedged strategies. Alternatively, investors may consider a 50% hedged investment strategy as a way to still keep their feet in the water without worrying too much about risks.
“Based on historical statistics over nearly the past two years, a 50% hedged approach consistently provided a competitive return compared to a fully hedged or unhedged portfolio,” Bruno said.
ETF investors may consider alternative options that take a more neutral view on foreign currency movements through a handful of 50% hedged/50% unhedged options, including the IQ 50 Percent Hedged FTSE International ETF (NYSEArca: HFXI), IQ 50 Percent Hedged FTSE Europe ETF (NYSEArca: HFXE) and IQ 50 Percent Hedged FTSE Japan ETF (NYS Arca: HFXJ). All three funds have approximately half their currency exposure of the securities in the underlying index hedged against the U.S. dollar on a monthly basis.
Along with the neutral hedged international ETFs to diversify away from large-cap U.S. stocks, investors may also consider multi-factor small-cap investments to capture potential opportunities at home.
A factor can describe any characteristic relating to a group of securities that can help explain their risk and return. Some of the most common factors that have been historically outperformed include size, value, quality, momentum, and volatility. The various factors can be combined to form a multi-factor, smart-beta ETF strategy.
“Single factors have been highly cyclical from year to year, and timing can be a difficult endeavor,” Bruno said. “Combining multiple factors creates a more diversified solution to potentially enhance returns over time.”
Investors may also focus on the small-cap segment as smaller stocks have historically outperformed large-cap stocks over time and recovered faster from downturns. Small-caps may also outperform ahead as the segment have historically done better than large-caps in periods of rising rates.
When looking beyond U.S. large-caps, investors can also consider something like the IQ Chaikin U.S. Small Cap ETF (NasdaqGM: CSML), which tries to reflect the performance of the Nasdaq Chaikin Power US Small Cap Index, which applies a shareholder yield screen and the so-called Chaikin Power Gauge, a quantitative multi-factor model that identifies securities expected to outperform their peers, to select components from the Nasdaq US 1500 Index. The target focus will include small capitalization stocks.
“The Chaikin Power Gauge is a factor-based model which combines four primary factors, including value, growth, technical, and sentiment to select stocks with the potential to provide enhanced returns over time,” Tom Psarofagis, Director of ETF Product Management at IndexIQ, said.
NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work
Written by: Jon Sabes
When you meet Carl Landry, stand-out college basketball player and nine-year NBA player, you imagine that becoming a professional basketball star was a straight forward run for the 6-foot-nine-inch power forward.
However, when you go deeper into Carl’s background, becoming a NBA professional was less than certain and little came easily to the 33-year-old from Milwaukee:
- He was cut from his high school team as a freshman and averaged less than ten points a game when he did play as a senior.
- He started his college career not at Purdue, but a junior college where it was not clear he would play.
- When he finally got to Purdue, he tore his ACL in his knee his first year and reinjured it the next year.
- While his family held a party for him the night of the NBA draft, he slept in the Philadelphia airport after missing a flight following a workout for the 76ers.
- In the NBA playoffs, Carl had a tooth knocked out, but came back in the same game to make a game-winning blocked shot as the Rockets beat the Utah Jazz 94-92.
Landry, who I interviewed on my podcast, Innovating Life with Jon Sabes (www.jonsabes.com), is a remarkable example of the value of “persistence.” In a time where technology creates the image that anything is possible at the touch of a button, persistence is an under-appreciated trait. When I spoke with Carl, I clearly saw someone for whom success has only come through a force of will that made him a NBA player, but it also made him a better player every year he played. That’s the kind of personality that has produced greatness in business as well as sports.
Carl was, in fact, drafted that night he spent in the airport. The Seattle Supersonics chose him as the 31st overall pick and then traded him to the Houston Rockets where he rode the bench for much of the first half of the season. When All-Star teammate Yao Ming was injured, he stepped in and played a key role in the Rockets astonishing 22-game winning streak (the third longest streak in NBA history). And, that season, after sitting on the bench for 33 of the first 36 games, he was named to the All-Rookie second team.
Carl was the first in his family to go to college. “I told myself that this was my ticket out, so I did everything I possibly could to be the best person in school and also on the court,” he said.
His family life in Milwaukee showed him what he didn’t want to do. “Just being honest with you, seeing some my cousins, peers, they went to work for jobs paying six, seven dollars an hour or they didn’t go to work at all and then living off welfare. I didn’t want that.”
When he was first injured, he had to contemplate the end of a career before it even got started. “When you have an ACL tear, it’s over…no more basketball,” he told me. “I said, God, give me health again and I’ll do everything I can to leave it all out on the line and be a successful individual.”
On my podcast, Carl pointed out another interesting lesson he learned in the NBA: Not doing things just to fit in.
“Fitting in was easy,” he said. “Doing everything that everybody else does was easy. If I stood out in some type of way, I’m going to have different results. I’m going to have stand-out results.”
That’s called the “Law of Contrast” and it produces that exact effect of changing the outcomes that everyone else is experiencing. Carl is smart, he recognized that differences make a difference, and doing whatever it takes is what is required to make real, meaningful differences.
Every off-season for the last 11 years, he has run a camp for kids in Milwaukee where he tells youth his story of hard work and persistence. “I always tell the kids to apply themselves and always be persistent,” he said. “If you dream, apply yourself and be persistent. With hard work, man, the sky’s the limit.”
When Carl says the sky’s the limit he means it. He is smart to recognize that it’s important to dream big, because if we don’t – we may be selling ourselves short. “You have to dream bigger than your mind could ever imagine,” he said. “I wanted a nice house. I wanted a nice car. I said, and I got all of that. So, what do I do, do I stop now? Maybe I didn’t dream big enough.” That’s a big statement coming from a kid who grew up to be the first in his family to graduate college and go on to be not only a top NBA basketball start, but a good businessman, father and someone who gives back to the community.
I’m convinced that in whatever he takes on as a basketball player or in his post-hoops career, Carl Landry is not going to stop getting better at whatever he does, and in the process of doing so, make the world a better place.
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