MW Here's where to find real stock-market bargains now. You just have to be willing to travel.

By Mark Hulbert

These ETFs take you far from the U.S. market

After many years in which the most overvalued stock markets unexpectedly beat the most undervalued markets, this year has experienced a reversal. Yet U.S.-centric investors, despite receiving more advice to diversify stock portfolios outside of their home market, aren't looking too seriously at the many attractive, undervalued markets around the world.

Poland is a good illustration. Its stock market's CAPE ratio at the beginning of the year - 9.22-was the second-lowest among the 26 countries whose equity valuations are regularly updated by Barclays Bank. The CAPE ratio, made popular by Yale University finance professor and Nobel laureate Robert Shiller, is one of the valuation measures with the best long-term record at forecasting subsequent returns - notwithstanding the past decade.

Since the beginning of the year, the Polish stock market has been the best performer of any of the countries in the Barclays database. The iShares MSCI Poland ETF EPOL has produced a year-to-date total return of 44.6% (through June 4), nearly seven times the 6.6% return of the Vanguard Total World Stock ETF VT.

The U.S. stock market's CAPE ratio at the beginning of the year of - 36.7 - was one of the highest in the Barclays database. And not surprisingly, the S&P 500 SPX has produced one of the lowest year-to-date returns: 2.1%, as judged by the SPDR S&P 500 ETF SPY.

Not all of the countries with the lowest CAPE ratios have performed well this year, but on average they significantly outperform the countries whose CAPE ratios at the end of last year were highest.

To show this, I measured the correlation between two rankings: One containing the Dec. 31, 2024 CAPE ratios of the 26 countries in the Barclays database, and a second containing the year-to-date returns of those countries' stock markets. The correlation coefficient is a significant minus-0.42, meaning that lower CAPE ratios were associated with higher returns, and vice versa.

This is a huge shift. For the decade prior to 2025, for example, the correlations between CAPE ratios and subsequent returns were strongly positive.

Perhaps this shift in the relationship is primarily the result of current U.S. dollar DXY weakness, in which case the shift would have little to do with valuation. That's because a strong dollar helps U.S. equity returns and hurts foreign markets' dollar-denominated returns. And since the U.S. stock market for the past decade has had one of the highest CAPE ratios in the world, the strong dollar therefore blunted the impact of valuation on countries' relative returns.

But a weaker dollar can explain only a small portion of the shift the global markets have experienced this year. When the U.S. is removed from correlations of year-to-date returns and beginning-of-year CAPE, the correlation coefficient changes only slightly, from minus-0.42 to minus-0.36.

There are no guarantees that this trend will persist, of course. There have been other several-month periods over the past decade when the lowest-CAPE markets have shot ahead, only to subsequently fall back.

Nevertheless, the valuation spreads between the most and least overvalued markets are wide enough to give pause to investors who exclusively choose U.S. stocks. Since the U.S. has the second-most overvalued stock market next to India (see the chart above), one way to get exposure to more undervalued markets would be to invest in non-U.S. equities. An ETF that bills itself as providing "access to the global stock market (excluding the U.S.) in a single fund" is the iShares MSCI ACWI ex-U.S. ETF ACWX.

A more targeted approach would be to favor those countries with the lowest CAPE ratios. Of the five countries in the Barclays database that have the lowest current CAPE ratios, two are currently recommended for purchase by at least one of the top-performing newsletters monitored by my performance auditing firm: Italy, which has the third-lowest CAPE, and Germany, which has the fourth-lowest. Two ETFs that the newsletters are recommending for these markets are iShares MSCI Italy ETF EWI and iShares MSCI Germany ETF EWG.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: The S&P 500 isn't the only stock market pushing all-time highs. Consider yourself warned.

Also read: Here's what firms managing $20 trillion are actually doing. And they're not buying U.S. stocks.

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 06, 2025 07:40 ET (11:40 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.