Page 36 - DIY Investor Magazine | Issue 32

INVESTING IN DEVELOPED MARKETS (EX-US)
WHY A PORTFOLIO TILT?
By historical standards, US Equities have become relatively expensive; while these trends may persist and be justified by low interest rates or/and sectoral composition a marginal tilt is currently a consideration for some of our readers.
At Bankeronwheels.com, we believe in diversified investing;
if implementing a tilt can make overall high valuations more bearable so that investors can stick to their long-term strategy, it is a sin worth pursuing.
We think that in investing, perfect is the enemy of good; we can help you select the most diversified and cheapest funds to increase your returns. Let’s see what’s available.
KEY TAKEAWAYS
• We’ve focused on Developed Countries ex-US, and exclude Emerging Markets
• These comprise mainly (i) Japan (ii) the UK (iii) Continental Europe and (iv) Australia
• As with any active investing, some considerations may not be immediately obvious
• Global revenues may be more subtle to analyze than Market Capitalizations
• Sectors may matter more than countries; a value/growth rotation could have the biggest influence on your returns
• Unlike US investors, Europeans need at least 2 ETFs to gain exposure to these markets because ex-US funds are not easily available in UCITS format
• A European tilt brings mostly the same sectorial benefits as including Asian countries
• I also compare benchmarks for Europe ETFs including Stoxx, MSCI and FTSE Russell Indices
• A second step is to assess certain practical aspects when selecting ETFs including Tax optimization
• Finally, have a look at fees and compare performance!
STEP 1 – CHOOSE THE RIGHT BENCHMARK(S)
CHOOSING AN INDEX INVOLVES THREE ASPECTS:
• Market Capitalization is the most direct way of measuring country exposure risk
• Exposure to Economic Activity is the broadest way of assessing the impact of global revenue streams
• Benchmarks coverage varies based on companies’ size and inclusion of the UK
1. MARKET CAPITALISATION
How much exposure will I have to different markets if I buy a Developed Markets ex-US ETF?
World Equities ex-US illustration - Market capitalization for MSCI EAFE
Source: MSCI, Bankeronwheels.com, data as of January 2022
WHAT REGIONS ARE PART OF THE MSCI EAFE INDEX?
Developed Markets ex-US are often called EAFE; the MSCI EAFE Index was created to reflect the performance of predominately mid and large-cap stocks across 21 developed market countries in Europe, Australasia, and the Far East.
Essentially it is the MSCI World Index, stripped out of US Stocks; if this is relatively new, you may want to have a quick look at Equity ETF Benchmarks before digging deeper.
US Investors often use MSCI EAFE to get International exposure. EAFE countries can be divided into two regions:
European Markets – roughly 65% of the overall market capitalization.
DIY Investor Magazine · Feb 2022 36