Invest Now: Why International Stocks Are the Hidden Gem in Your Portfolio

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Summary

The S&P 500 has recently reached a record high, sparking concerns that investors may be missing out on potential gains. However, it’s essential to consider alternatives before investing in more exposure to the United States’ economy. International stocks are currently trading at lower valuations and have been performing better than their U.S. counterparts.

A Reversal of Leadership is Coming

The S&P 500, having reached another record high, has left many questioning whether they should jump back into the market or add more exposure to it. However, Morningstar’s Chief Investment Officer for the Americas, Philip Straehl, recently shared his perspective in a podcast interview with Morningstar Wealth. According to Straehl, there will be a reversal of leadership that drives U.S. stocks’ high performance, and non-U.S. stocks are expected to recover due to temporary factors affecting their underperformance.

Straehl’s points align with the opinions held by analysts at brokerage firms such as Charles Schwab, who believe international outperformance is continuing and may prompt even more investors to flow into international stocks. According to Jeffrey Kleintop and Michelle Gibley of Charles Schwab, this trend can last for years and "may not be too late" for those underweight in strategic targets to add international exposure.

A Better Value Proposition

The valuation argument is another factor that makes iShares Core MSCI EAFE (Europe, Australasia, and Far East) ETF a more attractive option compared to the SPDR S&P 500 ETF Trust. The current price-to-earnings ratio for the S&P 500 stands at 24.5 times its trailing earnings and 23.6 times its forward-looking earnings projections, which is relatively high by historical standards.

In contrast, foreign stocks are trading at their 10-year average price-to-earnings ratios. As Charles Schwab’s analysts point out, the MSCI EAFE’s 10-year average P/E stands at 14.2, while its trailing-12-month price-to-earnings ratio is slightly higher at 16.7.

International Exposure as a Hedge Against Uncertainty

Given the significant uncertainty surrounding several international markets due to the U.S.-China trade tensions and the devaluation of major currencies such as the euro and Japanese yen, many investors struggle to determine whether they should adjust their portfolios or stay put with domestic investments only.

However, one logical strategy would be to take advantage of these uncertainties by adding some international equity exposure. After all, historically, diversifying portfolios with a variety of stocks representing emerging markets has often led to impressive gains and helped reduce the impact of local economic crises on overall results.

Stepping Up International Exposure is Now Affordable

Diversification does not have to be expensive or overwhelming. With the iShares Core MSCI EAFE (Europe, Australasia, and Far East) ETF holding shares in large companies such as SAP, ASML Holding, and Nestlé within its diversified portfolio of stocks from more than 30 different countries.

So far, this specific mix of the best global equities at a price that seems attractive currently has allowed it to hold up surprisingly well even during periods when the value of U.S. dollars weakened. These companies would indeed be difficult for any investor to individually buy and monitor because their stock prices require significant resources in either cash or capital.

Diversification: A Good Idea Now

In conclusion, there are two very important factors to consider if you’re trying to pick the right sector: diversifying your investments is one strategy that can make a huge difference in making money without putting too much at risk; secondly, it’s equally as smart when economic conditions force many investors to face decisions they may not want to take or make. Buying shares from diverse companies across different industry types can lead to impressive gains over several long months.

And if we add the factor of valuations where these same foreign equities are trading at significantly more affordable levels than what we see in some popular U.S.-based stocks at this moment, it becomes a no-brainer for those willing to think ahead that adding an ETF which tracks international market trends makes absolute sense.