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Investors of foreign securities are also investing in a foreign currency as well. And with global markets being volatile and currencies likely to fluctuate substantially, it would be wise to engage in a hedge for currency —provided the investor doesn't have a strong view of the U.S. dollar.
The EAFE index has substantially underperformed U.S. equity indexes for years. At some point, theory suggests that EAFE should be cheap enough to be attractive.
Investing internationally is an important part of portfolio diversification and a way to capture exposure to some of the largest and strongest performing multinational companies like Toyota or Nestle.
Ex-US stocks are a bargain right now after a big 2022 drop, but that doesn't mean traders and investors should buy EFA. EFA features big relative weakness since the June 16 stock market bottom.
While U.S. equity markets are down in 2022, advisors have not experienced significant benefits of diversification through international equity markets, particularly if they ignored the small suite of currency-hedged products available. Indeed, the iShares MSCI EAFE ETF (EFA) was down 12% year-to-date through June 8, with the Japan segment of the index down 15%.
EFA provides exposure to large and mid-cap stocks in developed markets, excluding the US and Canada. The fund is well-diversified both across industries and constituents. Based on the fundamentals of developed markets in Japan and Europe, I believe EFA is poised to underperform the S&P 500 going forward.
