Want International Equities? Don't Ignore Active

A recent analysis by T. Rowe Price specialists highlights the advantages of active international equities ETFs over passive strategies, primarily due to concerns regarding the quality of underlying international indexes. They note that passive indexes like the MSCI EAFE included a higher percentage of firms with negative earnings from 2019-2024 compared to the S&P 500. Active management, through fundamental research, can better screen out lower-quality firms and navigate the inherent complexities of diverse international markets, positioning it as a potentially superior approach for investors seeking an edge in this segment.

Analysis

An analysis presented by T. Rowe Price specialists posits that active management offers distinct advantages over passive strategies within the international equity space, particularly in an environment of tariff uncertainty. The core argument centers on the quality of underlying benchmarks, with analysts noting that indexes like the MSCI EAFE contained a higher percentage of companies with negative earnings over the five-year period from 2019 to 2024 compared to the S&P 500. Active managers, through fundamental research and direct scrutiny, can selectively screen out these lower-quality firms that passive funds are compelled to hold. Furthermore, the piece highlights the inherent complexity of international markets, which operate across numerous monetary policy regimes, fiscal systems, and currencies—a landscape that active management is arguably better suited to navigate. The T. Rowe Price International Equity ETF (TOUS) is cited as a specific example of this approach, offering actively managed exposure to ex-U.S. developed markets for a 50 basis point fee.

Key Decisions for Investors

• Investors with significant exposure to passive international equity funds should review their holdings for potential over-concentration in lower-quality, unprofitable companies inherent in benchmarks like the MSCI EAFE.
• Consider complementing or replacing passive international positions with an actively managed ETF, such as TOUS, to leverage fundamental research and potentially avoid firms with weak financial viability.
• Monitor the performance divergence between active and passive international strategies, as it may widen if macro uncertainties, including varied monetary policies and tariff risks, persist.