Other markets have outperformed the U.S. this year amid concerns over President Donald Trump's trade war.MicroStockHub/iStockPhoto / Getty Images
Canadian investors typically own mostly North American equities and have profited from a U.S. stock market fuelled by the Magnificent Seven technology behemoths.
But other markets have outperformed this year amid concerns over “retaliatory tariffs” unleashed on April 2 by U.S. President Donald Trump that have ignited a global trade war.
In U.S. dollars, the MSCI All Country Europe Index has gained about 3.6 per cent this year, the MSCI EAFE Index (developed markets in Europe, Australasia and the Far East) is up 0.36 per cent, and the MSCI Emerging Markets Far East Index (51 per cent in China) has risen 2.2 per cent.
In contrast, the Bloomberg Magnificent 7 Total Return Index has shed 24.2 per cent, while the S&P 500 Total Return Index is down 13.7 per cent and the S&P/TSX Composite Total Return Index is off 6.2 per cent.
Although the U.S. “reciprocal tariffs” take effect April 9, some could be clawed back after negotiations, Mr. Trump has indicated. The current market volatility could wind up being a buying opportunity.
Globe Advisor asked three investment experts for their top picks among non-North American ETFs.
Linda Ma, vice-president of ETFs and financial products research at National Bank Financial Inc. in Toronto
The pick: Vanguard FTSE Developed ex North America High Dividend Yield Index ETF VIDY-T
International equity ETFs, which attracted a massive $3.8-billion in Canadian fund flows during March, are a compelling way to diversify from the potentially overvalued U.S. market, Ms. Ma says.
Stock valuations across the region covered by the MSCI EAFE Index are very attractive, with the forward price-to-earnings ratio at around 14 versus 20 for the S&P 500, she adds.
Europe will benefit from fiscal stimulus, with Germany approving massive infrastructure spending, while Japan is ending decades of deflation and has improved corporate governance, she says.
This Vanguard ETF, which has heavy weighting in financials, has a one-year distribution yield of 3.4 per cent, so that may appeal to more conservative investors, she says.
The 0.31-per-cent management expense ratio (MER) is still “quite cheap,” she adds, while risks beyond U.S. tariffs include interest rate changes and currency fluctuations.
The pick: Fidelity International High Quality ETF FCIQ-T
This international equity ETF can give investors exposure to “exciting new developments in technology” without the bubble-like valuations in the U.S. market, Ms. Ma says.
The fund, which focuses on companies with strong balance sheets and stable cash flow, has a higher weighting in consumer discretionary and technology names, she adds.
It tracks a Fidelity quantitative index and has a return on equity that’s much higher than the MSCI EAFE Index, she notes. “The 0.50 per cent MER is also reasonable.”
The international ETFs are equity ideas for long-term investment, she notes. Although the 20-per-cent U.S. tariffs slapped on imports from the European Union (EU) are a risk, they will likely be in effect for a shorter term in the grand scheme of things, she says.
David Kletz, lead portfolio manager, Forstrong Global Asset Management Inc. in Toronto
The pick: iShares MSCI Europe Financials ETF EUFN-Q
This European financials ETF will benefit from the region’s pivot to fiscal expansion to support growth as indicated by Germany’s major infrastructure and defence spending, Mr. Kletz says.
European banks, which make up 50 per cent of the ETF, are in good fundamental health after passing “stress tests” to cope with economic shocks, while a modest upturn in loan growth should gain traction as the European Central Bank lowers rates, he says.
The shareholder yield of banks, which includes dividends and share buybacks, are “attractive relative to other asset classes and sectors,” he says, adding it’s currently in the 7-per-cent range.
The 20-per-cent U.S. tariff on EU exports is a risk, but investors have “priced in” U.S. levies, so it’s not a total shock, he adds. The ETF’s 0.48-per-cent MER is elevated but still reasonable.
The pick: KraneShares Bosera MSCI China A 50 Connect Index ETF KBA-A
Chinese stocks have rallied following the release of startup DeepSeek’s breakthrough in artificial intelligence, but the gains have been concentrated on its offshore internet equities, Mr. Kletz says.
The KraneShares ETF, which owns China’s 50 large-cap domestic A shares, is compelling because it has not yet had a similar upside, he notes. “The 0.56-per-cent MER is also competitive.”
The outlook for Chinese stocks is improving given the government’s pullback from its crackdown on technology firms and ramp-up of fiscal stimulus to offset weakening export demand, he adds.
China faces total U.S. tariffs of 54 per cent and has responded by slapping a 34-per-cent retaliatory levy on U.S. imports.
However, exports to the U.S. are a “relatively small contributor to Chinese GDP,” and China has been diversifying exports to other emerging markets, Mr. Kletz notes.
Kenneth Lamont, principal of manager research, Morningstar Inc. in London
The pick: Schwab Fundamental International Equity ETF FNDF-A
This international equities ETF allows for diversification across many industries in developed countries even though the top exposures include exporters such as Japan and Germany, Mr. Lamont says.
“Unfortunately, the U.S. plays such a pivotal role in the global economy that the recent tariff announcements leave very few places for equity investors to hide,” he acknowledges.
This ETF has a low, 0.25-per-cent MER, which “has helped it appear in the top 25 per cent of peers over five- and 10-year trailing periods,” he adds. “It remains a solid bet.”
The ETF is value-oriented and can help diversify away from the more growth-oriented U.S. market, Mr. Lamont notes. Because it’s aimed at Americans, it also has a small 8.5 per cent weighting in Canada.
The pick: iShares MSCI Japan ETF EWJ-A
This Japan-focused ETF is attractive because it offers diversification to a highly developed economy in Asia as opposed to having to invest in riskier emerging markets, Mr. Lamont says.
Although Japan is facing a 34-per-cent reciprocal U.S. tariff, this ETF is still “a solid bet over the mid- to long-term,” he says.
Japan’s blue-chip global firms “will adapt to any new normal,” he says. And the likely appreciation of the Japanese yen, should the world tilt away from the U.S. dollar, “will boost returns and soften some of the damage to exporters,” he adds.
This fund holds 200 of the largest Japanese companies, including large holdings in industrial and consumer technology companies such as Toyota Motor Corp. ADR TM-N and Sony Group Corp. ADR SONY-N
The ETF’s 0.50-per cent MER is competitive among peers, he adds.