Over the last two years, foreign markets have lagged far behind U.S. domestic markets. For the trailing 24 months (through April 30), the S&P 500 was up 34% compared to a 15% gain for the MSCI All-World ex-U.S. Index and about a 1% increase for the MSCI Emerging Markets Index.
After experiencing years of being outperformed by foreign markets, domestic markets have of course rotated back into favor. David Garff, president and chief investment officer of Accuvest Global Advisors, specializes in global portfolios and recently noted that the top performing countries have also received the most economic stimulus from their respective central banks.
This creates visibility for when foreign markets will again take the lead—at the end of large-scale bond purchases better known as quantitative easing (QE). Since the U.S. Federal Reserve Bank began to reduce its monthly asset purchases, its effects are starting to reflect in ETF asset flows.
Year-to-date (through April 30), three of the top six leaders in ETF fund flows track foreign equities indexes: the Vanguard FTSE Europe ETF (VGK), the Vanguard FTSE Developed Markets ETF (VEA) and the iShares MSCI EMU ETF (EZU).
The flows could be isolating a rotation from domestic back to foreign, or the data could simply be capturing a rebalancing effect because the performance dispersion has likely caused portfolio imbalances, or perhaps a combination of the two.
Whether or not there is currently a rotation occurring from domestic to foreign is certainly debatable, but if not now, there will be one at some point. It is the nature of foreign versus domestic—one outperforms for a time and then the other, and then it repeats.
