If you want to earn high returns, consider looking abroad. International markets have been providing superior returns in 2015, well above the 1 per cent return of the S&P/TSX composite index, and above the single-digit returns of the major U.S. indexes.
One relatively easy and cost-effective way for investors to diversify their portfolios and add foreign exposure is to buy exchange-traded funds.
There is a wide selection of ETFs to choose from and one of the key decisions investors must correctly make is their macro-call, or a bigger picture call, on factors such as: what sector, country, region, asset class, investment style, or commodity to invest in.
I screened for ETFs listed on the TSX that traded regularly and found top performers based on year-to-date returns. The results, shown in the accompanying chart, were based on data from the Canadian ETF Association and Bloomberg.
Looking at the list of top year-to-date performers, what impressed me is that they are mostly internationally focused ETFs, with three major themes – China, Japan and Europe. Investors have been plowing money into international equity funds with this asset class receiving large inflows of money. Many of these leading ETFs have provided investors with not only double-digit returns year-to-date, but on top of that, some of these winning ETFs pay investors dividends.
China-focused ETFs
ETFs tracking the red-hot Chinese markets have delivered impressive returns; however, there are red flags that may suggest caution. The rather parabolic moves in the Chinese markets may leave little runway for further appreciation. For instance, the Shanghai Stock Exchange composite index has rallied over 126 per cent over the past year.
Another concern is the blistering rate of new equity account openings. According to data from China Securities Depository and Clearing Co., there were 4.4 million new stock accounts created during the last week in May alone. That is a lot of new accounts and may represents a high number of speculative traders entering the Chinese stock markets. Furthermore, there is a flurry of new initial public offerings coming to market. In addition, economic growth, while high, has been contracting for the past four years and may slip below 7 per cent. Collectively, this data may be a warning sign to investors that there may be heightened volatility and potential large downside swings.
Japan-focused ETFs
Japanese ETFs may be attractive diversification investments that stand to benefit from an improving economy. The Bank of Japan's monetary policy statement gave a rather reasonable outlook for the economy stating, "Japan's economy is expected to continue recovering moderately." Indeed, it appears that a recovery is on track as the Bank of Japan continues its quantitative and qualitative monetary easing program. The central bank forecast 2015 and 2016 GDP growth rates of 2 per cent and 1.5 per cent, respectively. First-quarter GDP was 3.9 per cent, benefiting from better-than-expected capital spending.
The weak yen has been a positive for the country's export market. Earlier the month, the currency dropped to its lowest level in over a decade relative to the U.S. dollar.
Europe-focused ETFs
Once the uncertainty settles with the Greek debt situation, this region is also attractive as it is still in the early stages of its recovery mode and investors are able to participate from strengthening economic conditions.
Potential new ETF leaders? Think Nasdaq, health care
ETFs designed to replicate the Nasdaq composite index may deliver strong performance in 2015. Valuations for many stocks on the Nasdaq exchange are not trading at lofty multiples. Stocks such as Apple and Google are both trading at price-to-earnings multiples below their long-term averages. The Nasdaq itself is trading at a forward price-to-earnings multiple of 21.8 times, just above its long-term moving average.
ETFs levered to the U.S. health care sector may also flow into the list of top performers. In July 2014, U.S. Federal Reserve chair Janet Yellen warned of some biotech companies valuations being "substantially stretched"; however, the momentum has remained strong, and continued merger and acquisition activity and news of positive drug trials and approvals could continue to keep this sector in the limelight.
Jennifer Dowty, a Chartered Financial Analyst, writes exclusively for Globe Unlimited subscribers.