It’s happening: Domestic companies are returning their manufacturing to U.S. soil, a move sparked by supply-chain disruptions, geopolitical tensions and trade wars.
That will likely lead some people to ask: Is foreign investing dead?
Indeed, the performance results of exchange-traded funds in particular paints an ugly picture for foreign stocks. Over the past three, five and 10-year periods, popular international and emerging market ETFs have significantly lagged their U.S. equity ETF peers.
In 10 years, the Vanguard FTSE Developed Markets ETF gained only 57.39%, while the Vanguard FTSE Emerging Markets ETF gained only 32.27%. Meanwhile, the Vanguard Total Stock Market ETF jumped 204.87%.
Global markets have been repeatedly shocked over the last decade by black swan events that have hurt foreign investment and globalization.
In 2018, the Trump administration sparked a trade war against China, citing the national security and trade imbalances between the countries. These moves quickly reversed almost two decades of accelerated trade between China and the U.S.
Then came the outbreak of Covid-19 shortly thereafter, which dealt foreign equity markets another blow. The global pandemic broke supply chains and created unprecedented upheaval that still hasn’t fully repaired itself.
There are other factors at play, of course, but the bigger question is how long will the underperformance last?
Rather than waiting around for the answer, some investors are looking at an opposite trend known as “deglobalization” or “reshoring.” According to Chris Semenuk, a portfolio manager at Tema ETFs, this is the process of rolling back 20 years of globalization and its perceived ill effects.
“The U.S. government is trying to crowd in private investment into strategically important areas where the government wants our country to be more self-sufficient,” he said.
His firm hopes to take advantage of this trend with the recent launch of the Tema American Reshoring ETF (whose ticker symbol is “RSHO.”) This actively managed fund targets mostly midsize and smaller companies that the managers expect to benefit when manufacturing comes back to America. Although roughly 85% of the fund is allocated to U.S. stocks, the fund’s remaining allocation is to stocks from foreign countries like England, Ireland and Switzerland that are also participating in the reshoring trend.
The Tema fund holds a targeted portfolio of 31 stocks with an average market capitalization of $10 billion. The fund’s net annual expense ratio is 0.75%.
Has the demise of foreign equities been greatly exaggerated? Maybe.
In the end, supply-chain fragility, trade wars and other risks probably aren’t enough to derail foreign stocks. Moreover, domestic stocks have their own set of unique risks. In the meantime, asset allocators will likely keep their foreign equity exposure in the ETF portfolios they’ve built and ride out the storm.