Stock ETFs: The Cost of Viewing the U.S. as a ‘Safe’ Haven

ETF Trends

For the past five years there were reasonable arguments for keeping money in the United States.

While the United States endured a brutal recession and it is still suffering through an anemic recovery, on a relative basis the economy has been a bright spot, particularly compared to Europe and Japan.



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I believe this trend is likely to continue. While US stocks still appear reasonably priced, and downright cheap compared to fixed-income alternatives, they are relatively expensive compared with other countries. US large caps trade for 2.1 times book value compared with 1.45 for the rest of the world. This represents a 47% premium, which is well above the five-year average. US stocks look particularly pricey compared to Europe, which has a price-to-book ratio of 1.16; Japan with a P/B ratio of 0.96, and emerging markets with a P/B ratio of 1.56.



Should the full brunt of the fiscal cliff hit and remain in place, a prolonged period of fiscal tightening would dramatically alter the US growth picture. The United States would likely go from an environment of 2% growth to a modest recession. Under this scenario, Japan and perhaps even Europe are likely to grow faster in 2013.



Finally, apart from the return opportunity, there is a risk argument favoring a higher weight to international stocks.




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