The world is rapidly turning flat for U.S. investors seeking outsized returns from foreign stocks. Since Sept. 30, Latin American stocks, as measured by the iShares S&P Latin America 40 ( ILF) exchange traded fund, are down close to 11%, while the iShares MSCI Pacific ex-Japan ( EPP) ETF has dropped more than 7%. Not to be completely outdone, the iShares S&P Europe 350 ( IEV) has sunk close to 5%. And, after rallying for much of the summer on the heels of successful political reform, the iShares MSCI Japan ( EWJ) has stumbled over 4.5%. By comparison, the U.S.-based SPDR ( SPY), which tracks the S&P 500, is only down 3% in October. And that's in spite of market conditions choppy enough to make even the steeliest trader seasick. All this talk of poor performance is, of course, relatively speaking. Foreign stocks are still thoroughly thrashing U.S. stocks, which are down just over 2% so far this year. Latin American stocks, for example, are up 33% and both the Japanese and Asia ex-Japan ETFs are still up over 6% for the year. But since foreign problems often wash onto American shores with great fanfare and at an even greater cost to investors -- remember the Russian currency and Latin debt crises? -- the recent pullback in non-U.S. shares may be signaling domestic investors that its time to bring their greenbacks back home. "The exuberance of American investors for foreign stocks is coming to an end," says Charles Biderman, president of fund-flow tracker TrimTabs. Biderman started seeing the bulk of U.S. dollars flow into international funds last December when Americans grew jittery over a weakening dollar and a shaky U.S. economy. He says many investors took their cues from famed value investor Warren Buffett after he made negative comments on the U.S. economy and placed big bets against the U.S. dollar.
Buffett's wager has backfired thus far as the dollar has rallied. Furthermore, the U.S. economy has chugged along at a solid 3.5% clip, more than double that of Japan and almost triple Europe's growth rate. But despite Buffett's blunder and a world-beating U.S. economy, the U.S. fascination with foreign stocks has continued unabated. About 70% of all fund flows this year have been directed toward foreign stocks, according to Biderman, even though they make up less than 20% of the world's equity assets. "The massive inflows have extended foreign stock valuations to untenable levels," says Biderman. Multiples may be stretched and stocks may be sliding, but that still has not entirely dissuaded Americans from sending their money overseas. According to TrimTabs, foreign funds have taken in $5.6 billion this month through Oct. 19, while inflows into domestic funds were $3.6 billion. ETF inflows month-to-date, though, are showing a different, and perhaps more telling, story. U.S. ETFs have taken in $5 billion thus far vs. $1.8 billion for foreign ETFs, the first time in five months the scales tipped in favor of the U.S. Alec Young, equity market strategist at Standard & Poor's, says U.S. inflation fears, which finally hit the headline consumer price index earlier this month, are pushing stocks worldwide lower. And when that happens, foreign stocks, especially those in emerging markets, are inherently more volatile than the S&P 500. "Foreign stocks, especially emerging markets, are by nature more volatile," says Young. "They outperform during bull markets, but get hurt even more during corrections."