US Equity Versus The World? There's An ETF For That

While there are plenty of international equity markets, developed and emerging, that trade at attractive multiples relative to U.S. stocks, U.S. equities are still leading, and doing so by wide margins.

Entering Thursday, the S&P 500 was up about 14.60 percent year-to-date, an advantage of 550 basis points over the MSCI All-Country World ex-US Index.

What Happened

An obvious way to play the trend of U.S. equity leadership is to simply buy domestic, broad market funds and ignore the comparable international funds. However, there may be a better way. The Direxion FTSE Russell US Over International ETF RWUI, a recently launched exchange-traded fund, is designed to more effectively capitalize on the leadership by U.S. stocks than traditional broad market ETFs.

RWUI follows the Russell 1000/FTSE All-World ex US 150/50 Net Spread Index, a benchmark designed to exploit both strength in domestic equities and weakness in international markets. To get to 100 percent net long exposure, RWUI's underlying index has a 150 percent long position in the Russell 1000 Index and a 50 percent short position in the FTSE All-World ex US Index.

Why It's Important

“The combination of a stabilization of some macro risks, in addition to a resurgence of supportive fiscal policy, resulted in one of the strongest stretches of risk asset performances in quite some time,” said Direxion in a recent note. “This is not to say, however, that risks do not remain. Question marks around Brexit and U.S.-China trade are still out there, and potential results look less and less binary as time passes.”

RWUI debuted in mid-January, so its track record is not particularly long. But the fund has posted returns that are double those of the MSCI All-Country World Index since its debut.

“In terms of geographical exposures, the U.S. continues to be a leader for equity exposure for both performance and flows,” said Direxion. “While International exposure (particularly Emerging Markets) looks attractive from a relative valuations perspective, the same flight to quality and macroeconomic factors drove significant investor interest into U.S. equity assets year-to-date. Developed Markets outperformed Emerging Markets over the trailing 1 and 3 months, and investors should continue to watch the U.S. dollar as a proxy for their EM exposures.”

What's Next

For investors willing to wager that international stocks will, at some, point outperform their U.S. rivals, RWUI has a counterpart: the Direxion FTSE Russell International Over US ETF RWIU. That fund is long international stocks and short the Russell 1000.

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