Hi! As a bruising 2022 winds down, this week’s ETF Wrap gives you a look at how international markets have stacked up against the U.S.
U.S. stocks are broadly lagging international equities this year as investors wrap up their final week of trading for 2022.
Shares of the SPDR S&P 500 ETF Trust
have tanked 20.7% this year through Wednesday, a deeper loss than the 18.5% drop for the iShares MSCI ACWI ex U.S. ETF
which provides exposure to stocks in developed and emerging markets but excludes the U.S., according to FactSet data.
“Over the long run, the U.S. has consistently outperformed the rest of the globe, but this year the US’ relative strength has wavered,” Bespoke Investment Group wrote in its 2023 outlook report. “2022 was a year all about war, inflation, and the Fed.”
Russia invaded Ukraine in early 2022, a war that stoked even hotter inflation as the U.S. grappled with the highest cost of living in decades. U.S. stocks sank as the Federal Reserve shifted from its easy monetary policy to a hawkish stance of fighting surging inflation with aggressive interest rates hikes.
Developed markets are broadly faring better than emerging markets in 2022.
The iShares MSCI EAFE ETF
which tracks developed-market stocks in Europe, Australia and the Far East, is down 17% this year through Wednesday, also beating the S&P 500 index.
But emerging markets broadly fared worse than the widely-followed U.S. stock index, with the iShares MSCI Emerging Markets ETF
tanking 22.6% over the same period. Still, the Freedom 100 Emerging Markets ETF
which invests in emerging-market stocks based on personal and economic freedom metrics, has outperformed EEM, EFA and the S&P 500.
“Investors woke up to autocracy risk,” said Perth Tolle, founder of Life + Liberty Indexes and creator of the Freedom 100 Emerging Markets ETF, in a phone interview. She pointed to concerns surrounding authoritarian governments in China and Russia, countries that the ETF has excluded as result of its freedom weightings that are annually rebalanced in January.
The Freedom 100 Emerging Markets ETF, which trades under the ticker FRDM, was down 15.4% this year through Wednesday.
Emerging-market countries with “freer markets” have more flexibility to respond to market trends, said Tolle. The Freedom 100 Emerging Markets ETF cited Chile as its top country holding as recently as Sept. 30, followed by Taiwan and South Korea.
Chile “really outshined this year in our index” as a result of its diversified commodities exposure during a period of inflation, Tolle said. “They are one of the freer emerging markets, so they have a high allocation in our index,” she said, but added that gains of stocks in Chile this year propelled the country to its top holding.
Shares of the iShares MSCI Chile ETF
have jumped 14.8% in 2022 through Wednesday, FactSet data show.
Meanwhile, China is the largest geographic exposure for the iShares MSCI Emerging Markets ETF
followed by India and Taiwan, according to the fund’s fact sheet for the end of September. The iShares MSCI China ETF
is down 24.9% this year through Wednesday, according to FactSet data.
‘Decoupling’ from China
In Tolle’s view, “globalization is alive and well” and that’s going to give investors a choice in a world bifurcated between freer and less free countries. Within emerging markets, she expects that countries such as Chile, Mexico, and Indonesia stand to benefit from “the global trend of decoupling from China” as companies move production plants outside autocracies.
“We don’t penalize free trade,” she said. “What we do want to stay away from is that direct autocracy exposure,” where companies are at risk of having “to put state interests before all other shareholders and stakeholders like their customers.”
Mexico and Brazil also have helped the Freedom 100 Emerging Markets ETF’s outperformance in 2022, according to Tolle.
Shares of the iShares MSCI Brazil ETF
and iShares MSCI Mexico ETF
each have eked out small gains this year through Wednesday, with the Brazil focused fund rising slightly more than 1% and the ETF targeting Mexico edging up 0.2%, FactSet data show.
Russia ETFs halt trading in 2022
In authoritarian regimes, “there’s the risk of capricious government actions wiping out shareholder value overnight,” said Tolle.
She pointed to Russia’s invasion of Ukraine in February as such a risk. Russia-focused ETFs stopped trading in early March after Russian President Vladimir Putin’s attack on Ukraine.
The VanEck Russia ETF (RSX) halted trading on March 4 and an initial liquidation distribution is scheduled to be sent to shareholders on or around Jan. 12, according to a notice posted on VanEck’s website.
Beyond emerging markets, the iShares MSCI EAFE ETF, which tracks developed-market equities excluding the U.S. and Canada, ranked Japan as its biggest geographic exposure at the end of the third quarter, its fact sheet shows. The U.K. was its second largest exposure geographically and France was third.
Nick Kalivas, head of factor and core equity product strategy for Invesco ETFs, said in a phone interview that dividend and low-volatility strategies that have fared relatively well in the U.S. this year also have held up comparatively well in international markets.
For example, shares of the Invesco S&P Emerging Markets Low Volatility ETF
have fallen 7.6% this year through Wednesday, while the Invesco International Dividend Achievers ETF
has dropped 10.6%, according to FactSet data.
EELV selects low-volatility stocks, which “tend to be more defensive in nature” and don’t fall as much in “big selloffs” as seen in 2022, said Kalivas. As for the Invesco International Dividend Achievers ETF, he said its heaviest exposures based on geographies are in Canada and the U.K.
“The idea of dividends has really gained a lot of steam this year,” said Kalivas. “Dividend-payers tend to have a more defensive characteristic to them.”
As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.
iShares MSCI Brazil ETF
iShares MSCI Saudi Arabia ETF
Invesco DB Agriculture Fund
abrdn Physical Platinum Shares ETF
iShares S&P GSCI Commodity Indexed Trust
|Source: FactSet data through Wednesday, Dec. 28, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater|
…and the bad
KraneShares Global Carbon Strategy ETF
First Trust Nasdaq Clean Edge Green Energy Index Fund
Invesco WilderHill Clean Energy ETF
ARK Innovation ETF
ALPS Clean Energy ETF
- Element Funds said Thursday that it launched the Element EV, Solar & Battery Materials (Lithium, Nickel, Copper, Cobalt) Futures Strategy ETF under the ticker CHRG.
VanEck announced Dec. 22 that it launched the VanEck Commodity Strategy ETF
an actively-managed fund that invests in commodity futures contracts in the areas of energy, precious metals, industrial metals, agriculture and livestock.
- Vanguard Group said Dec. 22 that it expects to launch the Vanguard Short-Term Tax-Exempt Bond ETF in the first quarter of 2023. The fund will mainly invest in short-term investment-grade municipal bonds and trade under the ticker VTES.