Because economic cycles can vary from country to country, getting international diversification can help mitigate and provide potential growth opportunities that aren’t available by tilting a portfolio strictly towards domestic assets. For an added layer of risk mitigation, investors can opt for a touch of quality as well.
If quality alone isn’t enough, then active management adds extra protection for risk control. This can all be had in one exchange traded fund (ETF): the American Century Quality Diversified International ETF (QINT).
QINT is designed to enhance core international exposure by applying a systematic methodology that emphasizes high-quality value and growth companies, primarily in developed markets. Features of the fund per its product website:
- Identifying quality companies with sound fundamentals and attractive growth and value characteristics.
- Responding to prevailing market conditions by adjusting exposure to growth and value styles.
- Managing risk through position limits and an emphasis on larger-cap/less volatile securities.
It can easy to get drawn in by a home bias, and with that home being the United States, it makes sense that investors will tailor their portfolios to the largest economy during times of economic uncertainty. However, a recent Forbes article noted that there have been periods of outperformance by international stocks where the U.S. appeared to falter, or as the article put it, “throne swapping.”
“The United States currently represents 60% of the global equity market,” the article said. “This means investors with an extreme home bias are ignoring 40% of the equity universe. In truth, doing so over the last 14.5 years would have worked out for you, but markets are cyclical, so it’s unlikely this lasts forever.”
The article presented a chart where certain time periods saw international equities dominate. For example, during the years leading into and after the DotCom bust, international equities (represented by the MSCI EAFE) saw strength as the U.S. was reeling from the internet stock bubble bursting.
“The United States doesn’t always dominate the global equity market! When U.S. stocks are facing headwinds, international stocks may rise to the occasion,” the article added further. “Sustained periods of outperformance by one region have been fairly common historically.”
As such, this diversification could serve investors well if the U.S. spins into a recession from the Federal Reserve’s aggressive rate hiking. International stocks could be the hedging component that portfolios need these days in terms of uncertainty.
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