International Equity ETFs Shine as Investors Turn Overseas
64min read The iShares msci EAFE ETF (IXUS) has drawn $1.4 billion in net inflows this year, a stark reversal from the outflows that dominated much of 2022 and 2023. This surge reflects a broader shift in investor sentiment toward international equities, as ETFs tracking developed and emerging markets attract record capital. But what’s driving this renewed interest, and how sustainable is the rally?
The Case for Overseas Exposure
The allure of international equities stems from three key factors: valuation gaps, currency tailwinds, and improving global growth prospects. The MSCI EAFE Index, which tracks developed markets outside the U.S., trades at a forward P/E ratio of 14.8—nearly 20% cheaper than the S&P 500’s 18.5. This discount has widened as U.S. stocks benefited from AI-driven optimism while European and Asian markets languished under slower growth and inflation headwinds.
Both funds have returned roughly 12% year-to-date, outpacing the S&P 500’s 4% gain. This outperformance isn’t just about value; it’s also tied to the U.S. dollar’s decline. The Dollar Index (DXY) has fallen 5% since January, making overseas earnings more valuable when converted back into dollars.
Inflows Reflect a Structural Shift
The trend isn’t limited to developed markets. The iShares Core MSCI Emerging Markets ETF (IEMG) has attracted $1.1 billion in 2024, even as geopolitical risks linger. Investors appear to be betting on a synchronized global recovery: the International Monetary Fund (IMF) now forecasts 3.4% global GDP growth in 2024, up from 3.1% in 2023.
Through August, $23 billion has flowed into international equity ETFs—more than double the $11 billion average over the past five years. This suggests investors are no longer just rotating capital but building long-term exposure.
Risks Remain, but the Reward Looks Compelling
Critics warn that international markets face headwinds: the ECB’s hawkish rate stance could slow European growth, while China’s real estate crisis lingers. Yet the data suggests the upside outweighs the risks. The MSCI All Country World Index (ACWI) has a 5.2% dividend yield—nearly double the S&P 500’s 1.6%—offering a cushion against volatility.
Conclusion: A New Dawn for International Equities
The $1.4 billion flowing into IXUS isn’t a blip but a signal of a broader reallocation. With valuations attractive, currency trends favorable, and global growth rebounding, international equities are poised to outperform. Investors who diversify into ETFs like IXUS or the $7 billion Vanguard FTSE All-World ex-US ETF (VXUS) stand to benefit from both rising markets and a weaker dollar.
While no investment is risk-free, the data underscores a compelling case: international equities are no longer the “also-ran” asset class of the past decade. For portfolios overly exposed to U.S. markets, this trend offers a rare opportunity to rebalance—and potentially outpace domestic returns.
The numbers tell the story: after years of underperformance, international equities are finally turning the tide.
