International exchange-traded funds are all the rage.
Over the past year, about 40% of net cash flow into ETFs has gone into international products, according to Paul Mazzilli, director of ETF research at Morgan Stanley. In the third quarter alone, $2.1 billion of net new assets went into international ETFs, while domestic large-, mid- and small-cap ETFs all experienced net outflows, he reports.
"A lot of money has gone into international ETFs
Strong performance has clearly played a part in investors' desire for overseas ETFs. The largest international ETF in terms of assets, the iShares MSCI EAFE Index (EFA), which tracks one of the best known benchmarks for non-U.S. stocks, is up almost 20% year to date and is one of several international ETFs to have outperformed the S&P 500 over the past one-, three- and five-year periods.As with any area that's in vogue, ETF providers are taking notice and launching oodles of related products. As of Oct. 31, there were 81 international equity ETFs, up from 49 at the end of 2005, according to the Investment Company Institute. Assets in those ETFs have risen to $95.35 billion from $65.2 billion. "The product developers aren't stupid, says Matthew Hougan, senior editor of the Journal of Indexing and Web site IndexUniverse.com. "There's been such huge asset growth in international ETFs over the last few years
As overseas markets continue to outperform,
money and ETF offerings have followed
"A lot of the reason that people became interested in international investing was that the international market was simply doing that much better than the U.S. market was," says Lipper senior research analyst Andrew Clark. However, a lot of the strong performance came from a weakening dollar, which hit a 20-month low vs. the euro on Monday. But there's no guarantee the dollar's slide will continue, and investors with 50% or 60% international exposure should "consider paring that back somewhat, especially if you have exposure outside of the" European Union, says Clark, who believes about 25%-30% international exposure is appropriate for most investors.