Key Takeaways
- Global equity funds attracted $18.9B in inflows amid peace deal and strong earnings optimism.
- A falling dollar and easing geopolitical risks favor investor inflows to global ETFs.
- Global equity ETFs provide diversification benefits while improving risk-adjusted return potential.
Recent optimism surrounding a potential U.S.-Iran peace deal has shifted investor attention back toward global equities. According to LSEG Lipper data, global equity funds extended their inflow streak to six consecutive weeks through April 29, as quoted on Reuters.
Per LSEG Lipper data, strong corporate earnings sentiment helped offset worries surrounding geopolitical tensions and higher crude prices, driving $18.91 billion in weekly inflows in the week ended April 29 after $48.67 billion the week before.
This trend can also be highlighted by the performance of the S&P World Index, which tracks the performance of stocks from 24 developed economies, which further underscores sustained investor interest in global equities. The index has gained 11.52% so far in the current quarter and 6.99% year to date. The index has added 28.70% over the past year.
Market participants are increasingly moving past geopolitical concerns and embracing a more risk-on stance. Continued enthusiasm around artificial intelligence and moderating volatility have strengthened investor confidence, helping global equities regain traction. The CBOE Volatility Index, which reflects market expectations of near-term volatility, has declined nearly 30.57% over the past month.
Strong U.S. Markets Can Lift Global Equities Too
The strong rally in U.S. markets, with the S&P 500 gaining 1.46% on Wednesday, alongside an 11.80% rise over the past month and a 7.08% gain year to date, could also serve as a tailwind for international equities by boosting global risk sentiment and supporting broader market momentum.
Strength in U.S. equities could generate spillover effects across global markets, improving overall risk sentiment and supporting capital flows into international equities. Rather than simply rotating away from U.S. assets, investors may increasingly look to global markets for more attractive risk-return opportunities, broader geographic exposure and enhanced portfolio diversification.
Dollar Weakness May Unlock Global Market Opportunities
Weakness in the U.S. dollar is also providing support for global equities. The greenback strengthened as a key safe-haven asset amid heightened risk aversion during the Middle East conflict. Improving investor risk appetite has reduced demand for safe-haven assets, contributing to a softer greenback and encouraging flows into global equities.
According to TradingView, the U.S. Dollar Index (DXY) has fallen 0.27% over the past five days and 2.15% over the past month. The index has also recorded an all-time decline of 18.38%.
Another factor that could weigh on the U.S. dollar and support global equities is the possibility of a pullback in U.S. markets, which may reduce investor demand for U.S. assets and place downward pressure on the greenback. As capital flows gradually shift away from the United States, demand for the greenback softens, leading to a potential depreciation in its value.
The Risk Narrative in U.S. Markets May Not Be Over: Diversification Matters
Even though U.S. markets are currently rallying, underlying vulnerabilities suggest that broader risks remain unresolved. The possibility of oil prices staying elevated even after the reopening of the Strait of Hormuz, along with rising gasoline prices, could keep inflationary pressures elevated in the United States.
In a more bearish outcome, persistent unfavorable economic conditions could also heighten recession risks in the United States. The rally, driven in part by declining oil prices, could be leading investors to underprice key macro concerns, particularly the risk of a potential recession and the broader impact of ongoing energy market disruptions (Read: Are Markets Sleepwalking Into Recession? ETFs for Portfolio Resilience).
Global ETFs to Explore
Investors may find global equity ETFs an effective way to diversify geographically. Beyond the diversification and tax efficiency inherent in ETFs, global equity funds can enhance geographic balance, improve portfolio resilience and potentially strengthen risk-adjusted returns over the long term.
Below, we have highlighted a few ETFs that can help investors broaden global diversification.
Vanguard Total International Stock ETF (VXUS – Free Report)
Vanguard Total International Stock ETF has a basket of 8,794 securities and has major allocations to Japan (15.32%), the U.K. (8.96%) and Canada (8.28%), with Europe (37.57%), Pacific (26.87%) and emerging markets (26.4%) being the major regions where the fund has allocated its assets.
Vanguard Total International Stock ETF has double-digit exposure to financials (22.55%), industrials (15.75%) and technology (14.63%).
Dimensional InternationalCore Equity Market ETF (DFAI – Free Report)
Dimensional International Core Equity Market ETF has a basket of 3,647 securities and has major allocations to Japan (22.75%), Canada (12.63%) and the U.K. (12.38%).
Dimensional International Core Equity Market ETF has double-digit exposure to financials (23.64%) and industrials (19.13%).
Avantis International Equity ETF (AVDE – Free Report)
Avantis International Equity ETF has a basket of 3,301 securities and has major allocations to Japan (21%), the U.K. (13%) and Canada (12%), with Europe (54%), Asia-Pacific (31%) and North America (13%) being the major regions where the fund has allocated its assets.
Avantis International Equity ETF has double-digit exposure to financials (23%), industrials (19%) and materials (13%).
Schwab InternationalEquity ETF (SCHF – Free Report)
Schwab International Equity ETF has a basket of 1,497 securities and has major allocations to Japan (20.71%), the U.K. (12.16%) and Canada (11.01%).
Schwab International Equity ETF has double-digit exposure to financials (24.41%), industrials (18.31%) and information technology (11.32%).
Vanguard FTSE All-World ex-US Index Fund (VEU – Free Report)
Vanguard FTSE All-World ex-US Index Fund has a basket of 3,884 securities and has major allocations to Japan (15.38%), the U.K. (8.89%) and Canada (8.24%), with Europe (37.75%), Pacific (27.04%) and emerging markets (26.35%) being the major regions where the fund has allocated its assets.
Vanguard FTSE All-World ex-US Index Fund has double-digit exposure to financials (23.61%), industrials (15.32%) and technology (15%).
Schwab Fundamental International Equity ETF (FNDF – Free Report)
Schwab Fundamental International Equity ETF has a basket of 907 securities, with major allocations to Japan (22.89%), the U.K. (15.67%) and Canada (9.01%).
Schwab Fundamental International Equity ETF has double-digit exposure to financials (16.64%), industrials (14.91%), energy (13.13%), materials (11.70%) and consumer discretionary (11.17%).