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It's Time to Look Abroad to Enhance Your ETF Portfolio

Stocks in this article: VIX.X ENZL EWY AAXJ

NEW YORK (ETF Expert) -- There are some good reasons for U.S. investors to start looking at exchange-traded funds with an international focus to enhance their portfolios.

Last week, at the same time the Dow had been hitting an all-time high, the Russell 2000 had been crossing below its long-term 200-day trendline. This particular divergence between U.S. large-cap stocks and U.S. small-cap stocks has only occurred on two other occasions over the past four-and-a-half decades -- in early 2000 and in the summer of 2007.

The recent weakness in smaller equity investments may or may not be an indication of an eventual breakdown in the broader U.S. stock asset class. When one employs 10-year trailing price-to-earnings (P/E) ratios, U.S. stocks are more expensive than any other stock asset grouping on the planet. The last time that occurred? Early 2000.

Other fundamental indicators are equally disconcerting. For instance, the U.S. traded near 24 times its average earnings over its previous five years back at the start of the previous bear (10/07). Its 5-year trailing P/E has crept back up to 23 today.

It should be noted that the dot-com boom as well as the real estate bubble possessed characteristics that are not present in today's environment. Not everything syncs up with the years 2000 and 2007. Irrational exuberance? Not right now. Recessionary iceberg straight ahead? Probably not.

Nevertheless, it would be foolish to dismiss the technical and fundamental warning signs that exist. Even if a recession is not a probability at this juncture, contraction in the first quarter of 2014 is hardly a ringing endorsement for the well-being of the U.S. economy.

Similarly, enthusiasm for U.S. stocks may not have reached the euphoric levels of 2000 and 2007, but complacency can be seen in the CBOE S&P 500 VIX Volatility Index (VIX.X). It is almost as if nobody believes the S&P 500 could even pull back a modest 10%.

VIX 3 Years

So if I am not calling for a bear to slam U.S. stocks, what am I calling for? Relative outperformance for international equities.

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