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3 Foreign ETFs for the Second Quarter

Stocks in this article: AAXJ EDIV EMB

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert ) --The S&P 500 garnered as much as 5.4% in the first three months of 2011. What might we expect for the next quarter?

Other than Jim Cramer, most would likely concede that the April-June period could be a bit tougher for U.S. stocks. "Almanac traders" would point to 100 years of data on Q2 underperformance. "Inflation fighters" would chronicle the directionality of core and non-core consumer prices. Meanwhile, "monetary policy monitors" would discuss the anticipated conclusion of quantitative easing and the probable rise in treasury yields.

It's not that U.S. stocks look unattractive. On the contrary, U.S. mega-corporations present attractive valuations at 12-14x forward earnings. Yet earnings growth may be simmering down, as not every company can pass along increasing input costs for the products and services being sold.

I am convinced that the best prospects for Q2 will come from foreign ETFs. Not only did they underperform due to inflation scares in Q1, but emergers may be closer to shifting from tightening policies to neutrality. Stateside, we can only move in a tightening direction -- even if that direction is merely the end of quantitative easing.

Here are 3 Foreign ETFs that should outhustle the S&P 500 in Q2:

1. iShares All-Country Asia ex Japan (AAXJ). This fund tracks the MSCI All-Country Asia excluding Japan Index. While the S&P 500 has merrily traveled a path to 5.4% Q1 gains, AAXJ is down roughly -1.0%. Herein may lie a relative bargain.

Equally important, Asian neighbors of Japan stand to benefit the most from Japan's importing needs. China and Korea -- AAXJ's top two country holdings -- will export more to Japan while the yen is strong and they will export more to the world while Japan remains mired in rebuilding mode.

2. S&P Emerging Market Dividend (EDIV). I know that some readers may have expected me to go with the more established WisdomTree Emerging Market Equity Income Fund (DEM) for an emerging market dividend choice. And, in truth, these funds will mirror one another closely.

However, I've had tremendous success with Brazilian utilities -- both with respect to their yields as well as their growth prospects. It follows that EDIV has a larger weighting in the utilities sector than its rival; EDIV also has a larger weighting in Brazil. What's more, I am estimating that EDIV may be able to produce an annual yield closer to 4%; DEM's tendency is to come closer to 3.25%.

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