Persistent economic uncertainty continues to keep investors on their toes. While these concerns may not be strong enough to trigger a major risk-off move, they are gradually prompting investors to look beyond U.S. markets for fresh growth opportunities and greater geographic diversification.
Robust investment flows and rising assets under management highlight growing investor interest in global equity ETFs. As of the end of July, global equity ETFs held about $17.17 trillion in assets and attracted approximately $197.7 billion in inflows during the month, underscoring strong and growing demand for global equity exposure, as per LSEG Lipper data.
Against this backdrop, rising economic uncertainty and volatility in the world’s largest economy could encourage investors to look beyond U.S. securities and increase allocations to international markets, seeking greater geographic diversification and potentially more attractive risk-return opportunities.
Economic Uncertainty Strengthens the Case for Going Global
The outlook for the U.S. economy remains clouded by persistent economic uncertainty, with the future path of inflation emerging as a key concern. Gauging where inflation is headed remains particularly challenging, leaving investors with limited clarity about the trajectory of inflationary pressures.
The uncertain inflation outlook also makes it more difficult to assess the Fed’s next moves, complicating expectations for monetary policy and adding to uncertainty around investor sentiment and market expectations. Adding to uncertainty surrounding U.S. economic policy is Fed Chairman Kevin Warsh’s preference for a less-is-better approach to monetary policy communication, which leaves investors with fewer clues about the central bank’s policy outlook.
Meanwhile, ballooning U.S. national debt presents another challenge for the world’s largest economy. With the national debt having crossed the $40 trillion mark, growing concerns about the country’s fiscal position could further weigh on investor confidence in U.S. assets.
Dollar Weakness Could Also Make Global Markets More Attractive
Weakness in the U.S. dollar could provide an additional tailwind for global equities. While the near-term outlook for the greenback remains constructive and could support the dollar through 2026, longer-term structural headwinds continue to cloud its outlook.
A softer dollar over time could improve the relative appeal of international assets and encourage investors to increase allocations to global equities. Rising uncertainty over U.S. policy and persistent concerns about the country’s increasing national debt could weigh on demand for U.S. assets and place downward pressure on the greenback, further strengthening the case for international diversification.
No Need to Abandon the U.S. to Embrace Global Growth
It is important to note that global equity funds can benefit from both uncertainty and strength in the United States. While rising uncertainty may encourage investors to seek diversification abroad, a strong U.S. economy and market rally can create positive spillover effects across global equities, boosting investor confidence and risk appetite, encouraging broader equity participation.
U.S. markets continued to show encouraging momentum, with the S&P 500 Index gaining 0.72% on Thursday. The index is now up 0.85% over the past five trading sessions and 4.54% over the past month. The tech-heavy Nasdaq Composite has also maintained its strength, rising 1.57% on Thursday and advancing 1.31% over the past five sessions and 6.91% over the past month.
Here’s Why Global Equity ETFs Could Be Worth Considering
In many ways, diversification is no longer simply an option but an increasingly important strategy for navigating markets marked by persistent economic uncertainty. It has long been one of the most effective ways to build more resilient portfolios and achieve a balanced risk-return profile.
The uncertain economic environment may encourage investors to look toward international equity markets, in search of greater geographic diversification and higher long-term return potential. An increasingly complex geopolitical landscape reinforces the importance of spreading risks across sectors, asset classes and regions, making emerging market funds a potential tool for portfolio diversification.
Global ETFs provide broader geographic exposure, helping reduce concentration risk while creating a more balanced portfolio. Investors should maintain a long-term investment horizon when investing in emerging market funds, as their higher volatility can lead to short-term fluctuations.
Building a More Global Portfolio With ETFs
Investors can consider funds like Dimensional International Core Equity Market ETF DFAI, Avantis International Equity ETF AVDE and Schwab Fundamental International Equity ETF FNDF.
Financials and industrials are the two largest sector allocations across all the funds, with each fund maintaining double-digit exposure to both sectors. Regarding annual fees, DFAI is the cheapest option, charging an annual fee of 0.18%. The above funds maintain well-diversified portfolios, with no single holding accounting for more than 3.8% of the portfolio.
Japan, the United Kingdom and Canada are among the top country allocations across the mentioned funds. FNDF is the largest option, with an asset base of $26.21 billion, while DFAI is the most liquid, with a one-month average trading volume of about 1.9 million shares.
Performance-wise, FNDF has given a better performance among the abovementioned funds. The fund has added about 3.3% over the past month, 5.8% over the past three months and 40.1% over the past year.
Tap Into Global Value ETFs
In addition to providing broader geographic diversification, international funds with a value tilt can offer investors an added advantage in the current market environment. Value investing has become particularly compelling as investors seek companies with strong fundamentals, solid financial health and attractive valuations.
Value ETFs focus on stocks characterized by strong fundamentals and robust financial health, which trade below their intrinsic value. Investors can consider Dimensional International Value ETF DFIV, Avantis International Large Cap Value ETF AVIV and iShares MSCI EAFE Value ETF EFV.
Financials represent the largest sector allocation across all of the above funds, with AVIV having the lowest exposure at 31% and EFV having the largest, with an exposure of about 39.7%. Information technology, on the other hand, represents only a modest share of each portfolio, with AVIV holding the highest exposure at just 4%.
Japan is the largest country exposure across all the funds, followed by the United Kingdom. AVIV is the cheapest option, charging an annual fee of 0.25%. EFV is both the largest and most liquid fund, with a one-month average trading volume of about 2.76 million shares and an asset base of $31.99 billion.
The above funds maintain well-diversified portfolios, with no single holding accounting for more than 3.2% of the portfolio.
In terms of performance, EFV has outperformed over the past month and three months, gaining about 5.6% and 6.8%, respectively. However, DFIV has delivered stronger returns over the past year, surging about 36.9%.
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Schwab Fundamental International Equity ETF (FNDF): ETF Research Reports
iShares MSCI EAFE Value ETF (EFV): ETF Research Reports
Avantis International Equity ETF (AVDE): ETF Research Reports
Dimensional International Core Equity Market ETF (DFAI): ETF Research Reports
Dimensional International Value ETF (DFIV): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
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