Many investors have likely considered reducing their exposure to U.S. stocks over the past year. That "ABUSA" (Anywhere But USA) trade is supported by four core arguments.
First, the S&P 500 is still hovering near its record highs, looks historically expensive at 30 times earnings, and trades at a premium to most other global markets. Second, the S&P 500's gains were driven by a handful of mega-cap tech stocks -- including Nvidia, Microsoft, and Apple -- instead of a balanced mix of sectors. If those Magnificent Seven leaders sputter out, the entire market could crash.
Image source: Getty Images.
Third, declining interest rates will weaken the U.S. dollar and make overseas companies -- which report their earnings in stronger overseas currencies -- more appealing investments. Lastly, the Trump Administration's unpredictable trade policy changes, fluctuating tariffs, and pressure on Fed independence could drive even more investors away from U.S. stocks.
However, it can be challenging for some investors to pivot away from the U.S. market into unfamiliar overseas markets. So if you want to increase your overseas exposure but don't know where to start, it might be smart to invest in a well-diversified exchange-traded fund (ETF), which gives you instant diversification to a basket of top international stocks. Let's review one of those top funds -- the Schwab International Equity ETF (SCHF 0.88%) -- and see why it might be a good hedge against the U.S. market's near-term volatility.
NYSEMKT: SCHF
Key Data Points
What does the Schwab International Equity ETF own?
The Schwab International Equity ETF tracks the FTSE Developed ex-U.S. Index, which comprises mid- and large-cap stocks from developed markets outside the United States. Its five largest markets are Japan (20.6% of its portfolio), the U.K. (12.2%), Canada (10.9%), France (8.3%), and Switzerland (7.9%). It has zero exposure to mainland China.
By sector, the ETF allocates 25.4% to financial stocks, 18.3% to industrial stocks, 10.9% to information technology stocks, 9.3% to healthcare stocks, and 9.2% to consumer discretionary stocks. It splits the rest between the materials, consumer staples, energy, communication services, utilities, and real estate sectors.
It currently holds 1,498 stocks, including ASML (ASML 0.21%), Samsung, SK Hynix, Roche (RHHBY +0.64%), and HSBC (HSBC 1.46%). Some of those top stocks -- such as Samsung and SK Hynix -- can't be accessed by U.S. investors through regular exchanges.
The FTSE Developed ex-U.S. Index is a market-cap-weighted index rebalanced quarterly. Therefore, the stronger stocks will naturally stay in the index, while the weaker ones will drop out.
Schwab's ETF is passively managed and replicates the index's components to closely match its performance. Both the ETF and its underlying index have risen more than 40% over the past five years. Since it isn't actively managed, it only charges a low expense ratio of 0.03%.
As of this writing, SCHF has a net asset value (NAV) of $26.40 per share. That's just slightly below its current trading price of $26.60 per share, so it isn't overvalued relative to its underlying assets. It's also paid a trailing distribution yield of 3.4% over the past 12 months, which makes it an attractive ETF for income investors as interest rates decline.
Is it the right time to buy this international ETF?
I don't think it's a great idea to sell all your U.S. stocks, since the U.S. market has a proven track record of outperforming other markets over the long term. That said, investors who ignore international stocks could miss out on significant gains if the U.S. market stalls. Therefore, I believe it's still a great time to invest in SCHF -- even if you don't think the entire "ABUSA" thesis -- as a hedge against the U.S. market's near-term volatility.
