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Recent reports highlight U.S. investors' strong and continuing interest in foreign markets. In many cases, cash is being invested indirectly, often through exchange-traded funds (ETFs) that mirror the currency-adjusted performance of publicly-traded shares in countries around the world.
While there are any number of fundamental reasons for choosing one nation's equity market over another, sometimes interesting opportunities crop up that seem, at first glance anyway, mainly technical in nature.
A comparison of the relative performance of the country funds for the United Kingdom and Germany, both based in Europe and subject to a number of the same macroeconomic influences, would seem to suggest such an opportunity.
Over the past decade, the iShares MSCI United Kingdom Index Fund (AMEX: EWU) and the iShares MSCI Germany Index Fund (AMEX: EWG) have loosely tracked one another. On occasion, however, their paths have diverged, sometimes significantly, though they have eventually managed to get back in sync.
The recent underperformance of the U.K. market in comparison to its German counterpart represents just such a divergence. In fact, the differential between the two has widened out to a historically noteworthy extreme. That suggests the two markets could be nearing the point where they revert back to more normal form, with British shares outperforming and German shares lagging in the near term.
Under the circumstances, those who are thinking about investing in Europe through exchange-traded funds, or who have overweight exposure to the German market in one form or another, might want to consider shading allocations in favor of the United Kingdom ETF.
Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.
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