No wonder everybody and their brother wants into the international equity ETF business, it’s booming! While we have been skeptical about some of the me-too ETFs coming down the pike there is no doubting the popularity of ETFs, especially in the area of international investing.
Ian Salisbury at the Wall Street Journal reports on statistics showing the amount in international equity ETFs has doubled over the past year. Some of these assets may very well represent “momentum chasers” in the high performing emerging markets, it also represents a sign that domestics investors are genuinely taking to heart the common recommendation to keep a significant portion of their portfolios overseas.
This recommendation stems in large part from the diversification benefits received by adding assets that have a relatively low correlation with the domestic stock markets. The general perception is that the correlation between international stocks, represented by MSCI EAFE (EFA) index and domestic stocks, S&P 500 (SPY) has increased over time. While true, there is still a fair amount of variation in this correlation. Brett Steenbarger at TraderFeed examines the implications for the domestic market when the U.S. and the rest of the world are moving in lock-step, and vice versa.
Speaking of international ETFs, Ticker Sense has a new version of their cool, Global ETF Overbought/Oversold graphs.
One benefit of the rising assets in (and volume traded of) international ETFs is that it makes short-term trading in these markets far easier (and less costly) than it was even a couple of years ago. Jeff Miller at A Dash of Insight wonders why many high-profile traders don’t use futures which are potentially even more cost-effective than ETFs?
Long-time readers of this site know we have a particular interest in equity market seasonality. ETFs are a potentially useful tool in implementing these short-term systems. The always excellent CXO Advisory Group has a note up testing the validity of an end of the month seasonality system. Not surprisingly they find that since 1989 their version was profitable. They note this effect may be a function of the timing of various economic statistics. In addition, they post a note that seasonality also works in many international markets as well.
ETFs are a useful tool. While there may very well be some excesses building up at the moment, the fact is they make many investment (and trading) strategies available and viable. No complaints here.