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3 Reasons Foreign Stock ETFs Can Outperform U.S. ETFs

Stocks in this article: EWU FEZ IEV EZU HEDJ DXGE DXJ

The concept of valuation vis-a-vis corporate profits also favors foreign developed equities. On forward estimates of earnings, the Stoxx Europe 600 Index chimes in with a P/E ratio of 13.7; Factset tags the S&P 500 with an optimistic 15.1 based on estimates for the next 12 months of earnings. For those who place more value on trailing 12 months profits, SPDR EuroStoxx 50 (FEZ) currently shows a P/E of roughly 14; Biryini Associates pegs the trailing 12-month P/E estimate at a lofty 18.5. In sum, foreign developed stocks might be trading at a discount of anywhere from 10% to 30%.

2. Trading Volume

A funny thing happened on the way to the European credit crisis. Specifically, investors appear to accept the monetary unions commitment to the euro. In turn, more folks are venturing back into European equities. According to data provided by Merrill Lynch, stock mutual funds and exchange-traded funds dedicated to Europe just set a record with 20 consecutive weeks of inflow. The enormous amount of cash pouring into these funds forces money managers to increase their buying activity.

The increase in trading volume is not only evident in the inflow data but by the shares that European exchanges have reported as well. The current estimate for 2013 is that trading volume for European equities rose by roughly 20% year-over-year. Moreover, record levels of trading are being registered by institutional investors in "dark pools" venues that do not display prices so that participants can place orders anonymously.

What does it all add up to? Institutional and retail investors are rediscovering an appetite for European stocks. ETF enthusiasts may want to investigate the technically strong uptrends in regional stalwarts such as iShares S&P Europe 350 (IEV) and iShares MSCI European Monetary Union (EZU).

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