International ETFs: Diversifier for Outsized U.S. Growth Exposures

Fidelity Investments research highlights that developed-market international equities, particularly in Europe, offer significant valuation upside relative to the S&P 500 and provide crucial diversification for U.S. growth equity-heavy portfolios. The MSCI EAFE Index, exhibiting less company-level concentration than the S&P 500, underscores this potential for reduced concentration risk. Investors can gain this international exposure through various Fidelity ETFs, including the actively managed FENI, value-focused FIVA, and high-dividend FIDI, all offering diverse strategies at competitive expense ratios.

Analysis

Recent research from Fidelity Investments suggests a significant valuation opportunity in developed-market international equities, particularly in Europe, relative to their long-term valuation levels against the S&P 500. This presents a compelling case for diversification for investors with portfolios heavily concentrated in U.S. growth stocks. The MSCI EAFE Index, which is approximately 51% European, offers a practical benchmark and is noted for having less company-level concentration than the S&P 500, thereby reducing single-stock risk. Investors can access this thesis through several targeted ETFs. The Fidelity Enhanced International ETF (FENI) is an actively managed fund with a 29 basis point expense ratio that employs a multi-factor model including quality, growth, momentum, valuation, and non-traditional signals like options market data. For a value-focused strategy, the Fidelity International Value Factor ETF (FIVA) tracks an index of undervalued mid- and large-cap stocks in developed ex-U.S. markets for an 18 basis point fee. Alternatively, the Fidelity International High Dividend ETF (FIDI), also with an 18 basis point expense ratio, provides a factor-based approach targeting high-dividend-yielding international stocks to enhance portfolio income and potentially mitigate volatility.

Key Decisions for Investors

• Investors with significant exposure to U.S. growth equities should consider allocating to developed international markets to hedge against domestic concentration risk and capture potential valuation upside.
• Portfolio managers can select a specific strategy based on mandate: consider FENI for an active, multi-factor approach; FIVA for systematic exposure to the international value factor; or FIDI for enhancing portfolio income and stability through high-dividend stocks.
• Given the active and factor-based nature of these funds, investors should monitor their performance relative to the MSCI EAFE benchmark to ensure the strategies, offered at competitive expense ratios of 18-29 bps, are delivering alpha or intended factor exposure.